Price Discrimination by Monopolist

Conditions:
• Control over price
• No resale market
• Elasticity must differ across markets or consumers
First-Degree or Perfect Price Discrimination

For each unit sold the monopolist charges a

different price
 Second-Degree Price Discrimination
Different prices are charged for different blocks
of quantities but within each block price remains
the same.
 Third-Degree Price Discrimination
Two different prices are charged for the same
product in two different markets

Profit maximization requires MR = MC in both the

markets; i.e. MR1 = MR2 = MC

MRj = Pj (1 – 1/ej) j = 1, 2
Therefore, P1 ≠ P2 implies e1 ≠ e2
Also, e1 > e2 implies P1 < P2
P1

Market – I Market - II
 Differences between Monopoly and
Perfect Competition
Perfect Competition Monopoly
1. Large number of 1. Single seller
sellers 2. Complete control over
2. No control over prices prices
3. Demand curve is 3. Demand curve is
perfectly elastic downward sloping
4. Demand = AR = MR 4. Demand = AR > MR
5. No price 5. Price discrimination
discrimination possible
6. Price is lower 6. Price is higher
compared to monopoly
 Perfect Competition Monopoly
7. Free entry and exit 7. Entry and exit is
8. Zero profit in the long blocked
run 8. Positive profit in the
9. Consumer surplus is the long run possible
maximum 9. Consumer surplus is
less