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ECO 5 CA - Essay Example

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The product may be identical but there might be some subtle differences. The necessary conditions, which are fulfilled for the event of price discrimination, are the…
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First degree price discrimination- This incorporates negotiation between the individual customers and the seller for selling each unit of output at its corresponding prices, such that the monopolist can receive entire consumer’s surplus.
So long as the price, discriminating manages to reap part of the consumers’ surplus his total revenue will be at the peak level, even if sells the quantity at the intersection point of MC curve with the MR curve.
2) Firms that practice price discrimination decide to charge that price for which the marginal cost is equal to the marginal revenue. Corresponding to that point of equality, we will get another point on the average revenue curve, which will tell us the price that the firm should charge to maximize its profits. Firms can also charge price based on the elasticity of demand. This implies an important fact that a monopolist will always operate in the elastic region of the demand curve.
A monopolist will not be able to operate in the inelastic region of the demand curve because he will be getting negative marginal revenue, which is not at all desirable hence, he will operate only in the elastic region. If he operates in two markets where the elasticity is higher on one and lower on the other then he will charge a high price in the high elasticity market than in the low elasticity market. Producers can also decide their pricing strategies based on the marginal cost pricing approach. This means that if the producer operates in two markets and if he finds that the marginal cost of production if higher in the first market then in the second market then he will produce less in the first market and charge a high price in that market but in the second market he will produce more and charge a lower price thereby maximizing his profits. (Price Discrimination).
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