ECONOMICS

RESEARCH PAPER REVIEW

APPLICATION OF PRICE DISCRIMINATION ON ANY MONOPOLY INDUSTRY IN

INDIA

SUBMITTED TO: Prof. BISHAKHA GOSH

SUBMITTED BY: ADISHREE KRISHNAN (2022-5LLB-06)

Year I

Semester I

NALSAR UNIVERSITY OF LAW, HYDERABAD

Table of Contents
Abstract .................................................................................................... 3
Literature Review ..................................................................................... 5
Methodology ............................................................................................ 8
Discussion and Findings .......................................................................... 9
Conclusion ............................................................................................. 20
References .............................................................................................. 22

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 Abstract
This research paper focuses on the connect drawn between price discrimination and decision
making and its effectiveness. Price discrimination persists in 3 degrees, with each indicating the
methods using which firms can acquire profits and revenues- where each degree yields different
levels of the same. Through this paper, the author further explains the prerequisites for price
discrimination to take place- which ultimately remains closely related to the characteristics of
monopoly firms. Elaborating on this very concept, the theory of price discrimination, limited to
its first and second degree forms, is studied through its practical application in the Indian
Railways, along with a close scrutiny of its effectiveness when it comes to pricing decision
making.

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 Introduction

Market competition structures, regarding pricing decisions and the influential pull of the buyers
on the pricing, persists in 2 forms- perfect and imperfect market competition. Due to this very
fact, there exists an essential pricing theory. This is known as price discrimination and it remains
dependent on the kind of competition that is prevalent in a particular market structure. In most
cases, perfect market competition is associated with an imperfect market competition, where
prices are not determined by market mechanisms (Liu and Shuai, 2016). The intensity of price
discrimination in a particular market depends upon the degree or level of competition that exists
in that very market.
The term price discrimination refers to the economic practice of charging different prices to
consumers for a product that remains uniform throughout. Today, this very practice has been
utilised in markets where certain goods which are sold in markets at low prices cannot be easily
transferred to markets with relatively higher prices for those commodities (Samuelson and
Nordhaus, 2010). Hence, price discrimination aims to maximise the profits to its highest degree
possible- simply by spreading certain goods in an uneven manner based on different
demographics through strategic and economic avenues. This research paper studies the nature of
this price discrimination employed in monopolies, with a case study of the Indian Railways, and
evaluates the effectiveness of the same.

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 Literature Review

Development and Application of Price Discrimination

This present research paper aims to study the concept of price discrimination and its influence
and efficacy rate on decision making. The terms ‘price discrimination’ and ‘price differentiation’
are used in many studies by Pigou and Edgeworth. Joan Robinson, in the early 1930s, posited the
most original and holistic treatment to all aspects of price discrimination. Dupuit, in 1984, put
forward the notion that the concept of price discrimination referred to the phenomenon of
companies asking for different prices from customers based on their differential needs regarding
the product owing to the fact of belonging to different demographics. In 1932, Pigou categorised
price discrimination into 3 categories, which were distinguished based on the relative degree of
price discrimination prevalent in each. As a concept, price discrimination today remains highly
seen in the retail industry, the airline industry and many more. Moreover, studies in these very
industries after the applicability of price discrimination has shown high levels of profitability in
the firms. The theoretical necessity for price discrimination, according to economic theory,
which has been further proved by empirical studies, is that price discrimination as a concept
requires a flexible market that can be segmented- there must exist an easy flow. This theory was
confirmed and supplemented by Asplund in his studies of price discrimination. In the airline
industry, Puller identified that airway operators use the method of price discrimination to
maximise revenue by achieving differential prices through discrimination for different customer
demographics.
Price discrimination persists in 3 degrees- first, second and third degree. In first degree price
discrimination, the price of the product relates to the maximum the customer is willing to pay at
a given point in time- it echoes his maximum willingness to pay for a given commodity. Second
degree price discrimination remains dependent on the number of units of the given commodity
which is to be purchased. David illustrated this example through his study of Japanese
newspapers, which additionally proved that second degree price discrimination increased the
degree of social welfare. Third degree price discrimination depicts the change in pricing policy
of a given market, which is based on the price elasticities of demand across varying markets,
based on its ability to adapt to different segments of the market. In 1989, Holmes analysed third
degree price discrimination in an oligopoly. It was established that price discrimination could be

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used effectively and strategically to set prices for a firm to make profits and maximize consumer
welfare.
First degree price discrimination, which is also known as person specific pricing is a ubiquitous
concept in economics. Many theoretical studies such as those by Varian (1989) and Stole (2007)
explore this very concept. However, empirical studies of this concept remain very rare, for a
number of reasons. A primary one is the sheer illegality of the concept itself. In many areas
around the world, across many countries, it remains illegal and unlawful to charge individuals
different prices for things like haircuts and dry cleaning. At the same time, the whole idea of first
degree price discrimination falls through when the economic idea of reselling is brought in. This
can be explained in the following way. A person who gets a commodity for a lower pice can buy
it and then resell it to those individuals who face higher prices, which negates the goal of the
firm to charge different prices by segmenting the market into different groups. Another very
pertinent reason why there remains caveats in research regarding first degree price discrimination
is the simple fact that most firms choose not to disclose the fact that they are charging different
prices for different customers and hence data on them is rarely collected accurately.

Price Discrimination in the Railway Industry in India

A differentiation in railway rates across India is a very common occurrence today. When it
comes to studying industries that utilise price discrimination, the railway industry is one that
comes most to mind. This is due to the fact that it remains unmatched when it comes to sheer
diversity in terms of passengers and rate and price differentiation. The variations in railway rates
manifest themselves in relation to geographical locations and distance, as well as the types and
kinds of amenities and commodities. There are occasionally also certain destinations which are
separated for different rate making. The railway tariffs also contain details regarding these rate
conversions, always keeping in mind that they are constructed with some logical and economic
meaning in mind.
Concerning railway rates determination, many are of the belief that they are determined on the
basis of the “value of service” principle or “what the traffic will bear”. “What the traffic will
bear” simply refers to the amount customers are willing to pay under given circumstances, while
“value of service” refers to the amount paid in exchange for a specific value or quality of service,
with there existing direct proportionality between the two. Value of service, thus, indicates the

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pecuniary worth of a particular service as perceived by the customer- it indicates the amount is
he willing to pay rather than undertake the alternative of foregoing the choice altogether. Today,
the kind of price discrimination which persists in the Indian Railways is primarily of the second
and third degree, which shall be enumerated upon in later aspects of the paper.

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 Methodology
This paper descriptively analyses the concept of price discrimination in its first and second
degree forms, in relation to the railway industry of India. It involves the analysis of existing
literature on the topic- through research papers, as well as articles regarding renewed rates and
charges of the industry. The data and information mentioned in the aforementioned literature has
been thoroughly analysed, with parallels being drawn and the different implications and aspects
of the data being explored. The analysis of this paper uses economic concepts such as demand
and supply to further explain price discrimination in the railways.

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 Discussion and Findings

1. Markets and their Categorisation on the Basis of Competition

A market refers to a place where parties can gather to facilitate the exchange of goods and
services. The parties involved are buyers and sellers, and it could be on the basis of a virtual or
physical medium. While generically there are two parties in a market, more than two result in the
introduction of competition within the market. Markets can be categorised on the basis of
competition into two criteria- perfect and imperfect competition.
Imperfect competition can further be categorised into four categories- monopoly, duopoly,
oligopoly and monopolistic competition. The area under study in this research paper is price
discrimination under monopolies.
2) Monopolies as a Market Structure
Monopolies persist when the market consists of one major seller of a particular commodity in the
market. Therefore, there exists only one specific person or enterprise which is the supplier of a
particular commodity. The monopoly firm exerts control over the market, setting the price of the
commodities in the market. Monopolies are profit maximisers and aim for market strategies and
tactics which increase the chances of generating greater profits. In such markets, there are very
high barriers to entry and exit, owing to the fact that there exists predominantly one seller who
controls the production and distribution of a commodity. If any new seller tries to enter the
market, the monopolies, with their high level of control over the market price, can lower the rates
to undercut the newcomer firm, preventing them from gaining revenue, profits or market share.
Since there is exactly one main firm which supplies the commodity, coupled with the fact that
many firms cannot easily enter or exit the market, there remains no close substitutes to these
goods and services. Thus, there exists absolute product differentiation in a monopoly, owing to
the fact that there remains virtually no close substitutes to the particular good or service. An
excellent example of a monopoly is the railway industry, with it being known as the Indian
Railways in India. “The sources of monopoly power include economies of scale, locational
advantages, high sunk costs associated with entry, restricted ownership of key inputs, and
government restrictions, such as exclusive franchises, licensing and certification requirements,
and patents.” () These act as certain economic barriers which augment the monopolistic power in

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a market by creating extremely high barriers to entry and exit for any and all neighbouring firms
which may try to enter that specific market in order to produce that particular good or service.

3) Price and the Evolution of Price Discrimination as an Economic Strategy

In a time of increased modernisation, price has slowly evolved in its definition to become one
that is expressed in terms of money, as opposed to the earlier culture of the barter system. As an
economic concept, it is also utilised by the government for social regulation, through penalties
and rewards.

Due to the fact that there exists a fundamental scarcity in the resources we possess, there has
been a need to develop a system to assign prices and values. This has evolved into the pricing
system as we know it today. Resources are priced on their fundamental availability, with
naturally occurring and renewable resources like sunshine being free, while rarer items like fossil
fuels being charged at high rates. Thus, the concept of price is the outcome of scarcity. The price
systems’ main aim remains to organise economic activity in a cohesive and coherent manner. It
enables the purchase and sale of products across multiple mediums through a common
denomination.

The traditional pricing system is associated with charging a price that was the same as the cost of
that very product. Over time, it became acceptable to charge a value that was slightly higher, so
as to gain a fair profit out of the trade. In a free market, pricing is heavily based on the marginal
utility of the asset to the buyer and the seller, thus optimising the revenue earned by the seller on
the sale of that commodity.

Monopolies, as explained above, are a system where there is a high degree of control over
pricing. Hence, these economic structures remain the most viable for the application of price
discrimination. The practice of price differentiation is very common amongst monopolies across
the world- with these firms segmenting the population in various ways in a bid to maximise
profits. In the words of Joan Robinson, “The act of selling the same article, produced under
single control at different prices to different buyers is known as price discrimination”. () The
basic tenet of price discrimination is the belief of the seller that certain demographies of the

10
market can be made to pay different prices, whether more or less, for the same product or
service, simply based on how much they value that product or service in question.
Price discrimination succeeds in its goal when the profit that is earned by splitting the market
into multiple factions is greater than the profit earned through the sale of the commodity in the
single unified market. It also depends greatly on elasticity, with consumers in a relatively
inelastic market paying a higher price, and vice versa. It is vital to note that during price
discrimination, all markets and sub markets must be separated from each other by factors like
nature of use, time and geographical or physical distance.
There always remains the question of the ethical nature of price discrimination- it remains legal
due to the fact that the price change remains contingent to the dynamic nature of the market,
which allows for varying prices to be charged for the same product or service. It violates ethics
and the law only if the price discrimination carried out is a source of actual economic harm. The
importance of price discrimination arises from the fact that it distinguishes between customers
based on their willingness to pay. Pricing goods or services at the average cost could result in a
situation where those who possess lower price points are unable to purchase the commodity.
Hence, fixing price points could result in a stagnation of the market, resulting in market
inefficiencies from the perspective of both supply and demand.

In order for the successful application of price discrimination, economists have identified 3
specific conditions which need to be met. The company or firm in question must possess
significant market power. It also needs to possess the ability to be able to differentiate the
demand for its product or service and henceforth divide these vagaries into separate segments.
Lastly, the firm must also have the ability to keep its product or service secure, thereby
preventing its reselling from one consumer group to another- there must be no pre-existing
contact between buyers.

4) Types of Price Discrimination

There are 3 types of price discrimination, which are categorised on the basis of the degree of
discrimination present in them. The categorisations can also be expressed as personal,
geographical and on the basis of use categorisations.

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First Degree Price Discrimination
First degree price discrimination occurs when a firm or a business charges the maximum possible
price for every unit of the given product or service that is consumed. Considering the fact that the
prices are set on a unitary basis, the firm captures all the consumer surplus as its economic
surplus. First degree price discrimination can be seen in various industries which involve the
taking on of individual client services, where different prices are charged for each product or
service sold.

Second Degree Price Discrimination

Second degree price discrimination takes place when a company charges different prices for
different quantities of the product or service that is consumed. It manifests itself through coupons
or quantity discounts by the way of bulk purchases.

Third Degree Price Discrimination

Third degree price discrimination is said to occur when a given firm charges different prices for
the product or service based on the consumer group. This can be seen through examples of ticket
purchasing industries such as theatres, airlines or railways which may categorise ticket prices on
the basis of age demographics like senior citizens and babies. Third degree price discrimination
requires making sure of the fact that product which is sold in one segmental category cannot be
replicated and resold in another. It requires a careful categorisation on the basis of categories like
gender, sex, location, etc. An example of this can be seen through concessions made for students
studying in an educational institution.

5) Price Discrimination in Relation to the Railway Industry of India

The Indian Railways is the railway industry of India, which is primarily owned by the state. It is
the 4th largest rail network in the world, after the United States, Russia and China. The Indian
Railways hold a monopoly over the rail industry in India for multiple reasons. Firstly, they are
very capital intensive, which thereby results in a huge monetary burden to maintain, one that can
be undertaken by very few. The capital intensive nature of the industry is taken care of by the
Union through the development of a Rail Budget, designed specifically for monetary allocation
to the Indian Railways alone. Moreover, the Indian Railways, having existed for close to 200

12
years, has achieved an economies of scale. Its sheer vastness and ubiquity is a structure that is
extremely hard to replicate, thus closing off other potential firms or companies to the
development of rail. There are also various legal and governmental regulations set in place which
ensure the monopolisation of the Indian Railways in the rail industry, preventing other firms
from entering.

The Indian Railways notoriously charges different prices for an identical product based on
various consumer demographics, even though the cost of each unit to the company remains the
same. This position is one which is infeasible in perfectly competitive markets.

The Indian Railway primarily sees 3 forms of price differentiation or discrimination.

The first is segmental discrimination, which refers to the various concessions in train tickets
which are applicable for different segments of the population, where the segments are created
based on relative need. Examples could include segmental ticket prices for disabled passengers,
students enrolled in a school or university, war veterans, medical professionals like doctors or
nurses, as well as passengers with medical ailments and senior citizens.

A second form of categorisation is known as value added price discrimination, which refers to
the amount that is paid by a customer based on the kind of value he derives from the amenities
provided by that particular offer. Examples for this include, first, second and third tier AC, first,
second and third class, chair car, etc.

The third form of price discrimination that can be seen in the railway industry of India is time
based price discrimination, which can be seen through premiums that are applied to tatkal tickets,
which are booked by passengers on an immediate one day basis.

The Indian railways are able to enjoy price discrimination due to multiple reasons. The sheer
vastness of the market and its network and the necessary nature of its product ensures a very
wide customer base, which allows for extremely easy market segmentation through many
categories, such as on the basis of age, sex or job. The products that are sold by the Indian
Railways also remain ones which are not resalable, and hence the situation of an individual

13
buying and reselling the commodities at a cheaper price and undercutting the competition is an
imaginary scenario. Thus, the discounts offered to customers cannot be utilised by them in a bid
to resell and obtain a benefitting position for themselves. Owing to the fact that the Indian
Railways possesses a blatant monopoly in the industry, it is able to freely dictate its pricing
model without having to worry about competitive pricing, all while having the backing of the
Indian government itself.

While the Indian Railways today do not have many explicit models of first degree price
discrimination, there exists a plan for conducting online auctions of their freights. The logical
basis of this plan is to improve efficiency and maximise profits and revenue by a better
utilisation of the freight capacity by the auctioning parties.

There are many instances of second degree price discrimination within the Indian Railways. An
example can be seen through the base fares for rail tickets on the basis of kilometres. As the
distance increases, the fare charged per kilometre decreases.

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This is illustrated in the given picture. As seen from the image, for distances up to 300km, a base
fare of Rs. 440 is charged. Upon covering 491-500km, the fare becomes Rs. 651. So, for a
maximum of 300 km, the cost per kilometre is Rs. (440/300), which is Rs. 1.467. Upon travelling
a maximum of 500km, the base fare rises to Rs. 651. So, the cost per kilometre now reduces to
Rs. 1.302. Further, upon examining the last column of the table, for a maximum of 5000km, the
base fare charged is Rs. 3065 which translates to Rs. 0.613 per kilometre. Hence, there exists a
price discrimination regarding ticket pricing based on the quantity/ bulk of distance travelled,
with concessions offered as the distance increases.
Second degree price discrimination can also be seen through the Indrail passes provided by the
Indian Railways. These passes are created for foreign nationals for unrestricted travel across the
Indian Railway network without reservation of separate tickets. One pass is valid for up to 90
days. As seen from the image, the price of the pass per day reduces as the days of validity of the
pass is increased by the customer.

Much like second degree price discrimination, the Indian Railways makes heavy usage of third
degree price discrimination in its pricing strategies.

15
This can be seen through the segmentalisation of ticket prices for children, adults, etc. Children
under 5 years can travel for free, but in cases where they wish for a separate berth or seat,
payment would have to be made. As seen in the attached image, many categories of individuals
are provided by the Indian Railways, with differing rates, concessions and discounts provided for
each, thereby segmenting the market population and maximising profits as well as ensuring
welfare to the disadvantaged sections.
Additionally, the Indian Railways also charge a convenience fee for using its internet booking
platform to book tickets, with the current rates being Rs. 15 extra levied for non AC tickets, and
Rs. 30 for AC tickets.

16
They also provide circular tickets, which are advantageous for situations of a round trip, such as
sightseeing. These tickets are priced at lower price points than the fare points.
There also exists concessions based on destination, as seen in tickets booked for stations in the
North East.

Another method of price discrimination employed by the Indian Railways is the concept of
‘Surge Pricing’. It involves pricing its amenities differently per customer based on the total
number of seats which remain available. It is a form of third degree price discrimination. As per
the current surge pricing model of the Railway system, the price of the tickets rises with the
demand. When every 10% of the tickets on a given train are sold, the price of the remaining is
hiked by 10%, with the maximum hike being capped at 50%.

The concept of surge pricing and its relation to the consumer surplus can be explained through
simple demand and supply curves.

17
In the image shown above, the portion of the graph above the equilibrium price showcases the
consumer surplus, or the amount the consumer was otherwise willing to pay versus what they
actually end up paying. This consumer surplus is the basis of price discrimination, with various
firms aiming to exploit and test the amount that consumers are willing to pay for their services.
When it comes to surge pricing, the increase in the fare with the simultaneous decrease in supply
results in the supply curve shifting to the left, making more and more use of the consumer
surplus until it reaches the maximum price point that the consumer is willing to reach to avail
that particular product or service.

Such surge pricing by the Indian Railways does suffer certain drawbacks due to the dangerous
assumption made by the system that a consumer is willing to pay considerably higher prices for a
seat that could potentially remain vacant. So even with the absence of demand, a consumer
would have to pay a hiked price for the product. Thus, the surge pricing system requires a high
degree of modification, with more transparency ensured, with a limit also being placed on the
maximum rate which can be charged for a product to prevent a loss of customers- in a market
where the consumer base is scattered or unorganised, there may not be much resistance to a hike
in prices, but it may result in a shift to other alternatives- or otherwise unfair prices.

18
These pricing strategies have been employed by the Indian Railways in a bid to cover losses in
its revenue from the freight segment. This coverage of losses is necessary to expand operations,
improve customer experience and build more infrastructure and facilities for a more connected
rail network covering the entire expanse of the country. Moreover, passenger satisfaction
remains paramount and is also one of the most demanding cost incurring factors of any form of
transportation. At any given point, the idea of better trains and stations, moving at more efficient
speeds with higher capacities is desirable, and this requires a large amount of maintainable
capital. Hence, price discrimination through variable fares remains one of the best strategies to
make up for these necessary costs and avoid bankruptcy. With the advent of airlines however,
the otherwise inelastic market of the railways has become a bit more elastic, even more so by the
phenomena of slashing prices undertaken by the airlines. However, this remains a negligible
change in elasticity, with the rail industry still remaining relatively inelastic due to its huge
customer base as well as ubiquitous demand for its product and services. Ticket pricing in the
Indian Railways based on price discrimination has seen success, with them employing the
strategy in various ways. The third degree of price discrimination has been utilised the most,
with the company slowly branching into first degree. In spite of the price discrimination, data has
shown that the Indian Railways still provide the most affordable means of transport over long
distances, perfect for individuals who wish to travel on a budget across India.

19
 Conclusion
Price discrimination as an economic practice is one that is extremely common and known, with
its usage occurring regularly as well as being studied through various economic fora in order to
test its efficacy as a system. It has been established that price discrimination could be used
effectively and strategically to set prices for a firm to make profits and maximize consumer
welfare. In discriminating monopolies, it is common to price products differently for different
consumers, based on their willingness to pay, oftentimes dissociated from the actual cost of the
product or service itself. In such market structures it remains vital to have differences in price
elasticity of demand between the customers or markets. At the same time, to prevent reselling by
buyers at lower price points, there must exist certain economic barriers, whether it be through
formal legislation or otherwise.
Price discrimination as an economic strategy remains one which is profitable in some instances,
provided it is implemented correctly. The most important aspect of the strategy is to ensure that
the segmentation of markets ensures a higher degree of profit as compared to a uniform pricing
to the market as a whole.
In the railway system of India, a primary goal of the Indian Railways is to ensure a maximisation
of its load factor, which refers to the practice of a railway when it comes to selling all the seats
on its train on a particular journey to a certain destination. Since trains possess a certain level of
fixed costs, regardless of whether they’re carrying passengers at full capacity or not, it becomes
necessary to balance these costs though a complete sale of its seats. This can be done by
employing price discrimination. If, for instance, the Indian Railways charged on the basis of
average cost per ticket, there would be some individuals who remain below the pricing point and
are unable to purchase the ticket. Hence, there would be a loss of potential passengers to fill the
train, as well as a glaring social inequality. Hence, through price discrimination, there exists a
system of pricing differently and relatively for customers who may be able to afford more or less
than the average pricing point. This system possesses many welfare benefits, as well as
maximises the profits of the firm in question by covering a larger base of customers and
extracting the maximum possible revenue from each demographic.
Ticket pricing in the Indian Railways based on price discrimination has seen success, with them
employing the strategy in various ways. The third degree of price discrimination has been
utilised the most, with the company slowly branching into first degree. In spite of the price

20
discrimination, data has shown that the Indian Railways still provide the most affordable means
of transport over long distances, perfect for individuals who wish to travel on a budget across
India.

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