Discriminating Monopoly

What Is a Discriminating Monopoly?

A discriminating monopoly is a single entity that charges different prices — typically, those that are not associated with the cost to provide the product or service — for its products or services for different consumers. Non-discriminating monopolies, on the other hand, do not engage in such a practice.

A company that operates as a discriminating monopoly by using its market-controlling position can do this as long as there are differences in price elasticity of demand between consumers or markets and barriers to prevent consumers from making an arbitrage profit by selling among themselves. By catering to each type of customer, the monopoly makes more profit.

How Discriminating Monopolies Work

A discriminating monopoly can operate in a variety of ways. A retailer, for example, might set different prices for products it sells based on the demographics and location of its customer base. For instance, a store that operates in an affluent neighborhood might charge a higher rate compared with selling the product in a lower income area.

The variances in pricing may also be found at the city, state, or regional level. The cost of a slice of pizza at a major metropolitan location might be set to scale with the expected income levels within that city.

Pricing for some service companies may change based on external events such as holidays or the hosting of concerts or major sporting events. For example, car services and hotels may raise their rates on dates when conferences are being held in town because of the increased demand with the influx of visitors.

Housing and rental prices can also fall under the effects of a discriminating monopoly. Apartments with the same square footage and comparable amenities may come with drastically different pricing based on where they are located. The property owner, who may maintain a portfolio of several properties, could set a higher rental price for units that are closer to popular downtown areas or near companies that pay substantial salaries to their employees. The expectation is that renters with higher income will be willing to pay larger rental fees compared with less desirable locations.

Example of a Discriminating Monopoly

An example of a discriminatory monopoly is an airline monopoly. Airlines frequently sell various seats at various prices based on demand. When a new flight is scheduled, airlines tend to lower the price of tickets to raise demand.

After enough tickets are sold, ticket prices increase and the airline tries to fill the remainder of the flight at the higher price.

Finally, when the date of the flight gets closer, the airline will once again decrease the price of the tickets to fill the remaining seats. From a cost perspective, the breakeven point of the flight is unchanged and the airline changes the price of the flight to increase and maximize profits.