Discriminating Monopoly

Discriminating Monopoly

A single entity that charges different prices, which are not associated with the cost to provide the product or service, for its products or services for different consumers. A discriminating monopoly, by using its monopolistic 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.

An example 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.

Investment dictionary. . 2012.

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