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Home » Economics Homework Help » Microeconomics Help » Price Discrimination Timing
Price Discrimination Timing
Price discrimination may be possible yet it may not pay the monopolist to discriminate price in the separate markets. In other words the monopolist any is able to discriminate prices but it may not be profitable for him to do so. We have to see now under what conditions. It is profitable for the monopolist to discriminate prices between the two markets. Pike discrimination is profitable only if elasticity of demand inner market is different form markets only when he finds that the price elasticity of demand of his products different in the different sub-markets. We shall analyse below this condition for the profitability of price discrimination.

(a) When demand curves in the separate markets are is-elastic. If the demand curves in the two markets are is-elastic so that at every pried the elasticity of demand in the two markets is the same, then it will not pay the monopolist to charge different price in the two markets. Why ehn elastic of demand is the same in the tow markets, it follows form the formula MR = Ar (e – 1) / e that marginal revenues in the go markets at every price (every AR) of the good will also be the same. Now if marginal revenue at every price of the product is the same in the tow markets, it will not be profitable for the monopolist to transfer any amount of the good from one market to the other and thus to charge different prices of the good in the two markets.

(b) Then elasticity of demand is different in various markets at the single monopoly price. It will be to the advantage of the monopolies to set different price if price elasticityies of demand in the two markets at the single monopoly price are not the same. In fact if he wants to maximise profits he must discriminate price if the price elasticityies of demand in the tow markets at the single monopoly price are different. If the producer regards the two markets as one and charges a single monopoly price on the basis of aggregate marginal revenue and marginal cost of the output. He would not be maximizing profits if elasticizes of demand in the two markets at the single monopoly price are different. If price elasticity of demand is the same in the two markets at the single monopoly price it will not pay the monopolist to discriminate between the two markets even if the elasticityies are different at other prices.

Suppose on the basis of aggregate marginal revenue and marginal cost a monopolist fixes single price (which is called the single monopoly pierce) and charges the same price in both the markets. If the nor finds that price elasticity of demand at this single monopoly price is different he can increase his total prod it by discriminating prices between the two markets. How is it profitable for the monopolist to charge different price in the two markets when price elasticizes of demand in them at the single monopoly price are different? This follows from the formula Mr = AR (e-1) / e

When average revenue in both markets is the same that is when the monopoly is charges a single monopoly pierce in both the markets but price elasticizes are different in the two markets then marginal revenues in the two markets will be different suppose the single monopoly price is $ 15 and price elasticity of demand in markets A and B is 2 and 5 respectively. Then

MR in market A = AR (ea-1) / ea

= 15 2-1 / 2 = 15 x ½ = 7.5

MR in market B = AR (eb – 1) / eb

= 15 x 5-1/5 = 15 c 4/5 = 12


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