9.8

• Uniform Pricing: This occurs when a monopolist charges the same price to every customer. All consumers pay the same price, regardless of their willingness to pay.
• • Price Discrimination: This happens when a monopolist charges different prices to different consumers for the same product, based on factors that aren't related to cost differences. For price discrimination to occur, the firm must have market power (the ability to set prices above marginal cost).
• For a monopolist to successfully engage in price discrimination, three key conditions must be satisfied:

  • market power
  • information
  • costly resale
• Market Power: The firm must have the ability to set prices, meaning it's not a price taker (like in a competitive market).
• Information: The firm must be able to distinguish between consumers who are willing to pay different prices for the same product.
• Costly Resale: The good must not be easily resold by consumers who buy it at a low price, otherwise, those consumers could sell it at a higher price to others.
• types of price discrimination:

  • first degree price discrimination
  • second degree price discrimination
  • third degree price discrimination
• First-Degree (Perfect) Price Discrimination:

  • Here, the monopolist knows the exact maximum amount each consumer is willing to pay and charges each consumer that price.
  • Effect: The monopolist captures the entire consumer surplus (all potential profit from each consumer), and there’s no deadweight loss because the quantity produced is the same as it would be in a perfectly competitive market.
  • The monopolist charges the highest possible price for each unit and produces the efficient quantity.
• second degree price discrimination: The firm offers different prices based on the quantity consumed or other consumer choices. It doesn't know exactly who values the product the most, but consumers self-select based on their preferences.
• Third-Degree Price Discrimination:

  • The monopolist divides consumers into groups based on observable characteristics (age, location, etc.) and charges different prices to each group based on their price sensitivity (elasticity of demand).
• for third-degree price discrimination, the monopolist charges a higher price to the group with lower elasticity of demand and a lower price to the group with higher elasticity.
• implications of price discrimination:

  • profit maximisation
  • efficiency
  • welfare effects
• Profit Maximization: Price discrimination allows the monopolist to increase profits by extracting more consumer surplus. In the case of perfect price discrimination, the monopolist captures all consumer surplus.
• Efficiency: First-degree price discrimination is considered efficient because the monopolist produces the same quantity as would be produced in a perfectly competitive market. However, third-degree price discrimination might lead to an inefficient allocation of resources (deadweight loss).
• Welfare Effects: While price discrimination increases the monopolist’s profits, it may harm some consumers (those who are charged a higher price). On the other hand, some consumers benefit from paying a lower price (such as students with discounts).
• A monopolist charges different prices to different groups based on price sensitivity (elasticity of demand) because doing so maximizes their profits
• Elastic Demand: If a group of consumers is price-sensitive (elastic demand), a small change in price leads to a large change in the quantity demanded. For example, students, who may have lower incomes, tend to be more price-sensitive. If the price rises, their demand decreases significantly.
• Inelastic Demand: If a group of consumers is less price-sensitive (inelastic demand), a change in price has little effect on the quantity demanded. These consumers, like business travelers, will continue to buy the product even if prices go up.
• A monopolist seeks to maximize profits by equating marginal revenue (MR) with marginal cost (MC). However, because each group of consumers has a different sensitivity to price changes, the monopolist can exploit this difference by charging each group a different price.
• Group with Elastic Demand: Since these consumers are highly responsive to price changes, if the monopolist charges too high a price, they will significantly reduce the quantity they buy. To maximize profits from this group, the monopolist sets a lower price (P1) to sell a larger quantity (Q1). This leads to increased sales volume, which compensates for the lower price, allowing the monopolist to still make a profit.
• Group with Inelastic Demand: Consumers with inelastic demand are less responsive to price changes. Even if the monopolist raises the price, these consumers will continue to buy nearly the same quantity. For this group, the monopolist charges a higher price (P2) while selling a smaller quantity (Q2). Because demand is inelastic, the monopolist can raise the price without losing too many customers, which boosts profit margins.
• The monopolist produces different quantities for each group based on their price elasticity.

  • For the elastic group (Group 1), the monopolist sells more because the price is lower.
  • For the inelastic group (Group 2), the monopolist sells less but at a higher price.
• The monopolist makes more profit by price discriminating than by charging a uniform price across both groups. Here's how:

  • By charging a lower price to the elastic group, the monopolist sells more units and captures some consumer surplus, turning it into additional profit.
  • By charging a higher price to the inelastic group, the monopolist captures even more of the consumer surplus from these less price-sensitive consumers.
• In total, the monopolist's profits are maximized because they can:

  • Extract more surplus from the inelastic group (who are willing to pay more).
  • Still capture profits from the elastic group by selling more at a lower price.
• Price discrimination allows the monopolist to extract the maximum willingness to pay from each group. In a scenario with uniform pricing, some consumer surplus would remain with consumers. But with price discrimination, the monopolist captures a larger portion of this surplus as profit.
• • Profits are higher because the monopolist can sell to both groups at the most profitable price points (lower price to elastic consumers, higher price to inelastic consumers), ensuring they maximize revenue from each segment of the market.
• • Different prices are charged based on price elasticity:
  • Lower prices for elastic consumers (to increase quantity sold),
  • Higher prices for inelastic consumers (to maximize revenue per unit).
• • Total output is lower than in a competitive market because the monopolist restricts quantity to maintain higher prices.
  • Profits are higher because the monopolist captures consumer surplus by adjusting prices to each group's willingness to pay.