MONOPOLY & PRICE DISCRIMINATION
Price Discrimination
Single-price monopoly
Firm that is limited to changing same price for each unit of
output sold
Price discrimination occurs when a firm charges different
prices to different customers for reasons other than differences in costs
Price-discriminating monopoly does not discriminate based on
prejudice, stereotypes, or ill-will toward any person or group
Rather, it divides its customers into different categories
based on their willingness to pay for good
Requirements for
Price Discrimination
Although every firm would like to practice price
discrimination, not all of them can
To successfully price discriminate, three conditions must be
satisfied
–
Must be a downward-sloping demand curve for the
firm’s output
–
Firm must be able to identify consumers willing
to pay more
–
Firm must be able to prevent low-price customers
from reselling to high-price customers
Price Discrimination
That Harms Consumers
•
Price discrimination always benefits owners of a
firm
–
Can use this ability to increase its profit
•
When price discrimination raises price for some
consumer above price they would pay under a single-price policy it harms
consumers
–
Additional profit for the firm is equal to
monetary loss of consumers
Price Discrimination
That Benefits Consumers
•
Price discrimination benefits monopoly at the
same time it benefits a group of consumers
•
Since no one’s price is raised, no one is harmed
by this policy
–
When price discrimination lowers price for some
consumers below what they would pay under a single-price policy, it benefits
consumers as well as firm
Perfect Price
Discrimination
•
Suppose a firm could somehow find out maximum
price customers would be willing to pay for each unit of output it sells
•
It could increase profits even further by
practicing perfect price discrimination
–
Firm charges each customer the most the customer
would be willing to pay for each unit he or she buys
–
Increases profit at expense of consumers
•
Perfect price discrimination is very difficult
to practice in the real world
–
Would require firm to read its customers’ minds
•
Marginal revenue is equal to price of additional
unit sold
–
Firm’s MR curve is same as its demand curve
