Monopoly Price Discrimination
A monopolist may be able to charge different prices to different customers, primarily to increase its profits, if it can identify different types of customers whose demand curves are quite distinct. According to Edwin Dolan (1980), price discrimination is the practice of charging more than one price for different units of a single product, when the price differences are not justified by the difference in the cost of serving different customers.
The conditions under which a monopolist will be able to discriminate profitably are given as:
- The price elasticity of demand for the product must be different between classes of buyers or in each market. This may be due to differences in income level or in tastes. The firm will charge higher prices in the market where demand is less elastic to gain higher total revenue and profit.
- The firm must be able to segregate the different buyers according to their elasticity of demand, and the cost of such segregation must not be too high as to wipe off the intended profit of price discrimination.
- It must be impossible for some buyers to purchase the commodity at the lower price and then resell it to others at a higher price.
The profit-maximizing output level of the price discriminating monopoly firm is the output level where the marginal cost of its entire output is equal to the marginal revenue in each market.