The desirability of price discrimination in a market depends on the effects of price discrimination on consumers, firms, the government, and finally the economy as a whole.
Different groups of consumers are affected differently by price discrimination. Although consumers in the lower priced markets will clearly benefit from price discrimination, the majority of economically active consumers in society are negatively discriminated against, and this is regarded as ‘unfair’. Also, price discrimination can also be disadvantageous for consumers, as it mainly involves the loss of excess consumer surplus (which is then converted to extra revenue by the firm, in order to gain higher profits). This is illustrated in the example below :
In the diagram, if the firm charges price (A), then the firm’s revenue will be (AOCZ), and the consumer surplus is (WAZ). If the firm charges price (B), the revenue of the firm is (OBXD) and the consumer surplus is only (WBX). However, if the coach operator price discriminates and charges price (B) for quantity (OD) and then charges price (A) for quantity (DC), the consumers lose out on the consumer surplus (BXAY) which is captured by the firm in the form of extra revenue.
However, price discrimination can also be beneficial for the consumers. In cases where it leads to a greater expansion of sales and output as well as a significant fall in the average costs of production, even those consumers in a higher priced market will be obtaining goods at a lower price than they would have been charged in single market. (eg: if the coach operator is able to achieve economies of scale, he will be able to provide better quality cost-efficient coach services for even the higher priced consumers).
Price discrimination also benefits consumers when it enables a monopolist to earn a profit from some non-economic activity that might not have been otherwise possible. (eg: through price discrimination, the coach operator will be able to provide serves on less known unpopular routes, which would otherwise be loss making, and therefore not provided at all). This is illustrated below :
The MC curve meets the MR curve at point (X) on the graph. Hence, the optimum price level would be price (P). At that point, the costs of production are greater than the price of the product itself, i.e. cost (M). Hence, this leads to a loss equal to area (MPYZ). Even if the monopolist is prepared to accept a short-run loss, these losses cannot be sustained in the long-run and production will eventually have to cease. However, if the monopolist is able to price discriminate and charge some consumers (OQ) price (P1), while charging other consumers (QR) price (P), it becomes profitable for the monopolist to supply this product/service (as the increase in revenue (P1WVP) exceeds the loss of (MPYZ).
As price discrimination makes optimum use of consumer surplus, those consumers willing to pay a higher price for a good or service, are charged a higher price, while those who are unwilling to pay those high prices are charged a lower price. Hence, this may also be beneficial to the consumers, as it increases consumer equity and consumer welfare.
Price discrimination will always be termed as beneficial for the coach operator, as they are able to increase their own revenue and hence profit margins by exploiting consumers. They would be unable to achieve such high revenue levels in a single market.
The government will also benefit from price discrimination by the coach operator, but not by a very significant amount. The maximum benefit the government will achieve is through the higher tax revenue gained from corporation tax levied on the coach operator (as the coach operator now has a higher revenue). An increase in tax revenue is generally seen as advantageous because it may lead to a fall in the PSNCR (public sector net cash requirement), but this affect is unlikely to be seen in this situation.
Finally, society itself does not necessarily benefit from price discrimination. Sometimes, the increased profits achieved by the coach operator may benefit the economy as a whole, if they are reinvested in research and development and lead to the production of new, innovative, better quality products, or even improvements in productive efficiency. Some non-economic services (like coach travel on less-used routes) are also made possible through price discrimination and would not exist in single markets.
However, the practice mostly only serves to exploit consumers and in general terms, favours the firm employing the practice rather than the consumers receiving the services. Also, even through price discrimination, the firm still remains allocatively and productively inefficient, (as Price is not equal to Marginal Cost, and the coach operator does not produce its commodity at the lowest point of the AC curve). This results in low overall economic efficiency in the county.
