Microeconomics Question from Walter E. Williams:Edit
Construct a model of the price discriminating monopolist who sells in two markets. Show the quantities and prices for both markets that will maximize profits. What are the necessary conditions for price discrimination? Does price discrimination lead to a more "socially desirable" outcome? Explain.
AnswerEditNecessary conditions for price discrimination include separation/isolation of markets and a different elasticity of demand in each market. Included among these assumptions is the assumption that products cannot be resold in an effort to eliminate arbitrage based on price differences. Monopolies are no more or less socially desirable –they merely a transfer some of the consumer surplus to the producer.
In the Graph on the right the market with the steeper demand curve is less price sensitive, therefore a higher price can be charged. In the other market, a higher price will drive folks out of the market. In class, Dr. Williams gave the example of name brand whiskey vs supermarket lable. The assumption is that it was the same ingrediants, but the packaging was different. The better label was sold in the market with the steeper demand curve.
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