What is price discrimination ?how does a price discriminating monopoly firm decide total output and price to be charged in each market
Answers
The reason for a monopolist (or any other firm) to apply price discrimination is to obtain an increase in his total revenue and his profits.
By selling the quantity defined by the equation of his MC and his MR at different prices the monopolist releases a higher total revenue and hence higher profits as compared with the revenue he would receive by charging a uniform price.
We will start from the simplest case of a monopolist who sells his product at two different prices.
It is assumed that the monopolist will sell his product in two segregated markets, each of them having a demand curve with different elasticity. In figure 7.1 the demand curve D1 has a higher price elasticity than D2at any given price. The total-demand curve D is found by the horizontal summation of D1 and D2. The aggregate marginal revenue (MR) is the horizontal summation of the marginal-revenue curves MR1 and MR2. The marginal-cost curve is depicted by the curve MC.