Answer to Question #76281 in Microeconomics for Noa

Question

How can a monopolist become more profitable by means of price discrimination?

Answer 1

A Monopolistic seller faces no competition, as he is the sole seller of goods with no close substitute. A monopolist can charge different prices from different buyers for its same product and this act is known as price discrimination. The degree of price discrimination that the monopolist follows, is linked directly to the consumers' willingness and ability to pay for a particular good or service. It means that the monopolist can charge prices which may bear little or no relation to the cost of production.
Charging different prices from different consumers for the same product is not always profitable for the monopolist. The one condition that price discrimination is profitable for the monopolist is, when the elasticity of demand of the product produced by the monopolist in different sub-markets are different. This means that in sub-markets where the price elasticity is same, the profitability will be absent as marginal revenue of all sub markets are equal. In case of different elasticity in different sub markets, marginal revenue is also different which may induce the monopolist to withdraw the product from the sub-markets where MR is low and sell in the sub-market where MR is high. It is owing to the following relationship between Average Revenue (AR), Marginal Revenue (MR)and elasticity of demand(E) :
MR = AR x (E-1) / E
The monopolist has to decide the level of price and output in different sub markets which help it to maximize his profit. This is how can a monopolist can gain more profit by means of price discrimination.