What Is a Discriminating Monopoly?

A discriminating monopoly is a situation in which a major company within a marketplace offers different types of pricing to different customers. The reasons for this type of price discrimination will often vary, but typically have to do with maintaining market share within a certain demographic of clients that are considered desirable, or as a means of entering and cultivating a clientele in a completely new market location. This discriminating monopoly method typically includes structuring marketing and sales campaigns that are used to generate demand for goods and services at certain price levels, then incrementally increasing those prices once the demand is firmly established.

One of the easiest ways to understand how a discriminating monopoly functions is to consider a hotel chain that is considered to be among the most successful in the hospitality industry. When opening a new hotel, the business may choose to offer special pricing packages for the first several months of operation. This may include special rates for certain days, or discounted rate packages for extended weekend stays. By employing this strategy, demand for reservations is created, and over time guests enjoy the amenities sufficiently to book the same hotel for subsequent visits. After the hotel is firmly established and demand is consistent, special rates are offered less frequently even as the demand remains within acceptable levels.

The general idea of a discriminating monopoly can be employed in just about any industry. Telecommunications providers may offer special pricing for a limited time in order to generate additional demand and secure contracts that ensure a steady stream of revenue for several years. Airlines frequently use this approach to fill a certain number of seats when new flights are announced, reverting to standard pricing as the actual flight date approaches. Retailers can also use this general idea when opening new stores in previously untapped markets, building customer loyalty over time that makes it possible to retain those customers even when some of the special deals have expired.

While the idea of a discriminating monopoly is to create demand that over time leads to a solid customer base, there is some risk with this approach. For some clients, the focus will be strictly on the savings. Once those savings are diminished, those consumers will turn attention to competitors who offer superior pricing. Unless the business can offer something in the way of solid service, desirable features, or some other amenities to hold the attention of the consumer, the returns generated from using this approach may be less than originally anticipated.