Under certain

conditions, a
firm with
market power
is able to
charge
different
customers
different
prices. This is
called price
discrimination.
 Price discrimination is the ability to charge
different prices to different individuals or
groups of individuals.
 In order to price discriminate, a monopolist
must be able to:

 Identify groups of customers who have

different elasticities of demand;
 Separate them in some way; and

 Limit their ability to resell its product

between groups.
 A price-discriminating monopolist can
increase both output and profit.

 It can charge customers with more

inelastic demands a higher price.
 It can charge customers with more
elastic demands a lower price.
 For price discrimination to work, the firm
must be able to set the price.

 The firm must be able to “segment the

market” That is, the firm must be able to:
◦ Separate the customers
◦ Prevent resale of the product
 By discriminating, a monopoly firm makes
greater profits than it would make by
charging both groups the same price.
 A firm with market power could collect the
entire consumer surplus if it could charge
each customer exactly the price that that
customer was willing and able to pay. This
is called perfect price discrimination.
 Monopolists stop producing at the profit
maximizing quantity, which is less than the
socially efficient point.
 If a monopolist would produce more the cost

of production would be less than what

people would be willing to pay. But, it would
require cutting price for current customers.
 The total deadweight loss in the US, due to

those monopolies that exist, is between 0.5%

and 2% of GDP.
 PS is the difference between what producers
take in (TR) at a given level of production and
the minimum amount they would accept for
producing that level of output.
$/Q

MC

P’
AT P’ AND Q’, THE PS IS THE
SHADED AREA.

Q’ Q
 CS is the difference between what consumers pay
for a given quantity and the maximum amount
they are willing to pay.

$/Q

AT P’ AND Q’, THE CS IS THE

SHADED AREA.

P’

Q
 AT P’ AND Q’, THE WELFARE IS
THE
$/Q SUM OF THE SHADED AREAS.

MC

P’

Q
Q’
 THE SUM OF PRODUCER AND CONSUMER
SURPLUS IS MAXIMIZED WHERE THE
MARGINAL COST CURVE INTERSECTS THE
DEMAND CURVE.
Consumer surplus
Producer surplus

MC
P*

Q*
MR
$/Q Maximum surplus
MC

Deadweig
ht loss

D
Q
Q*
MR
End of Lecture