13.
Explanation
A discriminating monopoly, also known as price discrimination, is a market structure where a monopolistic firm charges different prices to different groups of consumers for the same product or service. Price discrimination occurs when the monopolist identifies different demand elasticities among
various customer segments and tailors pricing strategies accordingly. The firm aims to maximize its profits by capturing as much consumer surplus as possible.
To determine the equilibrium under a discriminating monopoly, several key points need to be considered:
1. Identifying Consumer Segments: The monopolist must distinguish between consumer segments with varying willingness to pay for the product. These segments could be based on factors like location, age, income, time of purchase, or other characteristics.
2. Price Discrimination Strategies: The monopolist then sets different prices for each consumer segment based on their perceived willingness to pay. This may involve charging higher prices to consumers with lower price sensitivity and lower prices to those with higher sensitivity.
3. Marginal Revenue: For each consumer segment, the monopolist calculates the marginal revenue (MR) associated with selling one more unit of the product. MR is the change in total revenue resulting from selling one additional unit.
4. Profit Maximization: The discriminating monopoly continues to adjust its prices for each segment until it reaches a point where MR equals marginal cost (MC) for each segment. In a monopolistic market, profit maximization occurs when MR = MC.
5. Differentiated Pricing: As a result of these pricing adjustments, the firm may sell the same product at multiple price points simultaneously. This means that consumers in different segments pay different prices for the same product.
6. Consumer Surplus Capture: Price discrimination allows the monopolist to capture more consumer surplus compared to a uniform pricing strategy. Consumer surplus is the difference between what consumers are willing to pay (their reservation price) and what they actually pay.
The equilibrium under a discriminating monopoly results in the monopolist achieving maximum profits while catering to various consumer segments’ willingness to pay. This pricing strategy can be seen in various industries, such as airlines (with different ticket classes), software (offering different versions), and entertainment (e.g., matinee vs. evening ticket prices).
It’s important to note that price discrimination may be subject to regulatory scrutiny in some cases, particularly if it is deemed to be anticompetitive or unfair to consumers.