Monopoly & Price Discrimination
1.Publishers set different prices for textbooks in different geographic markets (higher
in North America, lower in Europe) WHY?
Increases profits by permitting monopolist to sell additional output without lowering
Monopolist will charge high price to customers with low price elasticity of demand
and low price to customers with high price elasticity of demand
Monopolist must be able to segment its customers
If customers with high price elasticity of demand buy at low price and then resell at
high to other customers, price discrimination falls
2.Why do stores issue coupons, in newspapers of flyers or on the web, which permit
buyers to obtain a price discount?
Charging different prices for different participants
Buyers who use coupons: high elasticity of demand (elastic) (buy at discounted,
Buyers who do not use coupons: low elasticity of demand (inelastic)(buy at full,
3.Why is Monopoly “Bad”?
1. Allocatively inefficient (due to reduced output)
2. Not Monopoly profits
1. If consumer pays $1 more to producer as a result of monopoly price:
Consumer worse off by $1
Producer better off by$1
2. Transfer from consumer to producer
is consumer more deserving?
is producer more deserving?
3. Welfare cost of monopoly is loss in total surplus as output is reduced