Price Discrimination :monopoly

A monopolist can sometimes increase economic profit by charging higher prices to customers who value the product more.The practice of charging difference prices to different customers when the price differences are not justified by differences in cost is called price discrimination

Conditions

• The demand curve for the firm’s product must slope downward è the firm has some market power and control over price
• There are at least two groups of consumers for the product, each with a different price elasticity of demand
• The producer must be able, at little cost, to charge each group a different price for essentially the same product
• The producer must be able to prevent those who pay the lower price from reselling the product to those who pay the higher price

Model of Price Discrimination

Consumers are divided into two groups with different demands

Examples of Price Discrimination

• A Monopolist can charge high prices in cities and low prices in the villages for the same product
• Because businesspeople face unpredictable yet urgent demands for travel and communication, and because employers pay such expenses, businesspeople are less sensitive to price than householders
• Telephone companies are able to sort out their customers by charging different rates based on the time of day

Perfect Price Discrimination

• If a monopolist could charge a different price for each unit sold, the firm’s marginal revenue curve from selling one more unit would equal the price of that unit è the demand curve would become the marginal revenue curve
• A perfectly discriminating monopolist charges a different price for each unit of the good
• Perfect price discrimination gets high marks based on allocative efficiency
• Because such a monopolist does not have to lower price to all customers when output expands, there is no reason to restrict output