Justifiable Price 'Discrimination' under Conditions of Natural Monopoly.

This article presents the diagrammatic representation of price discrimination under conditions of natural monopoly. Writers in the economics of transportation and public utilities have usually upheld the basic idea of discriminating prices implicit in the rate structures of those industries. The justification of the discrimination has generally been based upon the propositions that the firms supplying the services are natural monopolies in the sense that under present conditions, at least, they make more efficient use of resources than can firms operating smaller plants and the products sold on the various markets are joint, if not identical, products. So the increased production to serve the needs of one of its groups of customers has the effect of lowering the average cost of serving all of the customers of the plant, in the long run. Thus the use of monopoly powers to invoke price discrimination is justified on the ground that it so increases production as to result in lower prices for all classes of users and higher profits for the industry. Some writers go on to justify particular rates which are substantially below average cost on the basis of these facts. All of these conditions and conclusions are capable of diagrammatic representation which will make them more concrete and evident.