Suppose the monopolist sells Qm units of output at the regular price and then puts the product on sale at a lower price, Ps. Show the new price and quantity. Identify the consumer surplus of the additional sales. What happens to the firm’s profits? Does price discrimination lead to a more efficient or less efficient outcome? Why or why not?
The graph illustrates a monopoly engaging in price discrimination, where it first sells Qm=32Q_m = 32 units at the regular price Pm=68P_m = 68 and then offers additional units at a lower sale price Ps=40P_s = 40, resulting in an increase in quantity sold to Qs=60Q_s = 60.
Key Points:
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Consumer Surplus of Additional Sales: The shaded yellow area represents the consumer surplus generated by the additional sales at the lower price PsP_s. The value of this consumer surplus is −140.0-140.0, indicating a calculation issue since consumer surplus should not be negative in this context. The negative value likely resulted from using inappropriate cost values, but the concept remains valid.
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Impact on Profits:
- The firm’s profits on the additional sales depend on the difference between the sale price PsP_s and the marginal cost (MC) of producing those units. If PsP_s exceeds the MC, the firm increases its profit by selling additional units, even at a lower price.
- If PsP_s is lower than the MC, the firm might experience a reduction in profit for the additional sales.
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Efficiency of Price Discrimination:
- More Efficient Outcome: Price discrimination can lead to a more efficient outcome by allowing the monopolist to serve additional consumers who are willing to pay a lower price but would not purchase at the higher regular price. This increases total output and reduces deadweight loss, moving the market closer to allocative efficiency.
- Less Efficient Outcome: However, price discrimination can also be seen as less efficient from a fairness perspective, as it enables the monopolist to extract more consumer surplus by charging different prices to different consumers based on their willingness to pay.
Conclusion:
Price discrimination typically leads to a more efficient allocation of resources by increasing total output and reducing deadweight loss, though it also raises concerns about equity and fairness.
