Monopoly 2. Price Discrimination Types of Price Discrimination Not related to Unit Cost of Production Most Common.

Monopoly 2

Price Discrimination

Types of Price Discrimination

Not related to Unit Cost of Production

Most Common

Price Discrimination by a Monopoly - Conditions

Deregulation = The reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry

Long Run Equilibrium Price Discriminating Monopoly (operating as a monopolist in the domestic market and facing perfect competition in the foreign export market)

AC

MC

D/AR/MR (Abroad)

D/AR (Home)MR (Home)

A

QaQb

P

Q

B

0

P1

P2

Explanation of Diagram

• Key Rule for Profit Maximisation for a Price Discriminating Monopolist = MC = MR (home) = MR (abroad) – at point A

• The firm aims to maximise profits and will produce in total Qa to sell in both the domestic and export market.

• The firm must then decide how much it should sell on the home market and how much should it sell abroad in order to maximise profits.

• It will provide 0 to Qb to sell at home at a price of P1 as the MR up to point B is greater selling at home than abroad.

• It will then switch at point B (where MR home = MR abroad) to selling the remainder of its output abroad, between Qb and Qa at a price of P2 as the MR abroad is now greater than the MR at home.

• Explanation of Long Run Equilibrium of Monopoly