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Home Price and Output Determination Under Monopoly Price and Output Determination Under Discrimination Monopoly

Price and Output Determination Under Discrimination Monopoly:

 

Price discrimination takes place when a given product is sold by a monopolist at more than one price and these price differences are not justified by cost differences. The price discrimination is possible under the following conditions.

 

Conditions:

 

(1) Monopoly power. The seller of a good must be a monopolist.

 

(2) Segregation of market. The monopolist must be able to segregate buyers into separate classes with different price elasticities.

 

(3) No reselling. There should be no possibility of reselling the good from a tow price market to a high price market.

 

Purpose of Price Discrimination:

               

The purpose of price discrimination by a monopolist is two fold. Firstly, to increase his total revenue and profits and secondly, to produce a larger output than a non-practicing monopolist. Determination of price and output under monopolistic competition.

                    

Price discrimination is possible and profitable when the monopolist is able to control the amount and distribution of supply and the buyers can be separated into different classes having a demand curve with different elasticities. Let us assume that the monopolist sells his total product in two sub-markets A and B. Sub-market A has low price elastic demand for the product and the sub-market B has high price elasticity of demand. The discriminating monopolist will sell a greater quantity of his product by making a price reduction in market B. He sells lesser commodity in market A at a price higher than in market B. The monopolist will then earn maximum profit by price discriminating as is illustrated with the help of diagram given below.

 

Diagram:

 

 

In this figure (16.7) market A and Market B have different elasticity of demand for the product of the monopolist. The slopes of the AR and MR curves in each market are different depending upon the elasticity of demand for the commodity. In market A, the elasticity of demand is relatively inelastic. The rise in price does not cause a much fall in demand. In market B, the demand for the monopolist product is relatively elastic.

 

A reduction in price leads greater increase in the demand for the product and adds more to the revenue. In figure, the combined marginal cost curve (MC) of the total output of the monopolist intersects the combined marginal revenue curve of the two markets A and B from below at point P. The best levels of output of the monopolist is OT given by the point P where MC curve cuts the AR curve from below. The monopolist Is to distribute this equilibrium output OT between the two markets A and B in such a way that the MR in each market is OP.

 

In market A, MR equates MC at point F. The monopolist sells output OB at price KB. In market B, where the demand is more elastic, the monopolist maximizes profit by selling output OB2 at price K2B2 in market B, where the demand is more elastic, the price K2B2 is lower than in market A, the profit of the monopolist is maximum when he sells output of OB at price KB in market A and output of OB2 at price of K2B2 in market B. The monopolist total profit is shown in the shaded area APE in figure 16.7c.

 

Summing up, a discriminating monopolist can maximize profits only when:

        

(1) It is profitable for him to sell the output in different markets.

 

(2) The price is charged in different markets in such a way that the last unit of the commodity sold in market gives the same marginal revenue.

 

(3) The marginal revenue is equal to the marginal cost of total output.

 

Relevant Articles:

 

What is Monopoly
Conditions/Base of Monopoly Power
Monopolist's Demand Curve
Short Run Equilibrium Price and Output Under Monopoly
Long Run Equilibrium Under Monopoly
Comparison Between Monopoly and Competitive Equilibrium or Perfect Competition
Misconceptions Concerning Monopoly Pricing
Monopoly Regulations
Monopoly Price Discrimination
Price and Output Determination Under Discrimination Monopoly
Assessment of Discriminating Monopoly or Price Discrimination
Dumping
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance
History of Money

 

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