A discriminating monopoly is an entity charging different prices for its services or products in different markets or consumers. The prices are usually not associated with the cost of the product or service provision. A company operating as a discriminating monopoly using its position in market control has the leverage of doing this by provided there are variations in the price elasticity of demand markets or consumers and barriers, thereby preventing consumers or customers from attaining arbitrage profitability by selling the products or services amongst themselves. Therefore, by ensuring that every consumer need is catered for, the monopoly, in turn, achieves maximum profitability (Brickley, Smith & Zimmerman, 2015).
Usually, when there are two or more market segments, and each experiences a difference in the price of the product or service charged by the monopolist, the monopolist must equate the marginal revenue with the marginal cost of each market segment. Marginal cost refers to the change in the total change in a product's production cost that results from the production of an additional unit. It is calculated by obtaining the change in production cost, divided by the change in quantity. If the marginal cost of the production of the extra unit is lower than the per-unit price, then there is a potential for making profits. Marginal revenue, on the other hand, describes the total revenue generated by the extra unit produced.
Discriminating monopolies operate in a variety of ways and are influenced by certain factors. For instance, the different prices of products and services can be established based on factors including the location and demographics of the firm's customer or consumer base. For example, the price of a product in a rich environment will potentially be higher than the price of the same product in an environment with lower-income consumers. Other factors affecting monopolists' product and service pricing also include holidays and major sporting events. This is because such events come with an increased demand for products due to the increased visitor influx.
Therefore, by targeting every consumer, the monopolist can make higher economic profits. Hence, price discrimination can only be achieved through the status of a monopolist firm to control production and pricing without competition. The main advantage associated with the price discriminating monopoly is that it increases the chance of maximizing profits. This happens when the monopolist charges different prices to different consumers in the different market segments. Sometimes it makes sense to charge lower prices to some consumers, provided that the price remains greater than the marginal cost.
This meets the condition for allocative efficiency in microeconomics; that is, a product should be...
…the monopolistic firm has generated higher profits by charging different prices to the two market segments. Also, from the calculations, the optimal prices result from setting the marginal revenue to be equal to the marginal cost in each of the segments and then solving for Q. price is then found from the equation for the demand curve for each segment (Brickley, Smith & Zimmerman, 2015).Calculations
Profit is maximized at the output quantity where marginal cost equals the marginal revenue. As stated earlier, the marginal revenue is the change in the revenue associated with adding an extra unit. In contrast, the marginal cost is associated with the change in the cost for the added unit. Hence, both the MC and the MR derivatives of the total cost and revenue functions, respectively.
Pie (QA, QB) = TRA (QA) + TRB (QB)-TC (QA+QB) = PA.QA + PB.QB-TC (QA+QB)
This results to;
Pie= (18-2QA) QA + (9-QB) QB (QA+QB) 2/4
Change in price/change in QA = 18-QA- (QA+QB)/2= 0
Change in price/change in QB= 9 2QA- (QA + QB)/2= 0
The profit-maximizing combination of the Qs has to satisfy the MR=MC.
QA is therefore equal to 6, while QB is equal to 6, and the respective prices are PA = 6 and PB = 3
The total profits are obtained by adding the profits generated by each market…
Reference
Brickley, J., Smith, C., & Zimmerman, J. (2015). Managerial economics and organizational architecture. McGraw-Hill Education.
Price Discrimination and Related Concepts In this paper, we will discuss some basic concepts regarding price discrimination and its related topics. We will first choose a product and outline its market structure, then by using a technique as described in the article written by Michael E. Porter we will discuss how the price of our chosen product should be decided so that profits are maximized. Finally, we will discuss how the
and, as mentioned before, discrimination allows for a more flexible reallocation of capital, benefiting the customer by increasing research and development of other goods and services. In the article "Taken to the Cleaners?" The author presents a real world case where dry cleaners are seemingly arbitrarily using price discrimination to mark up the price of dry cleaning for women's blouses vs. men's shirts. This is definitely a third-degree price discrimination,
Price discrimination is typically a means to increase profits, thus meaning that such concepts involve sellers having sufficient market power in order to be able to charge difference prices on account of diverse circumstances. Employing price discrimination practically influences buyers to want to buy more and thus benefits both buyers and the company using this technique. Many people are likely to consider price discrimination to be unfair because of how it
Monopoly Radical Treatise on Monopoly When a firm is the only seller or supplier of a good or a service for which there is no close substitute, it is referred to as a monopoly. Broadly speaking, every firm would naturally like to have a monopoly given that monopolies do not face competition. However, monopolists can only succeed in a market situation where the barriers to entry are very high (Brue & McConnell,
The OFT may then refer the companies to the Competition Commission (formerly known as Monopolies and Mergers Commission). The Competition Commission also plays a major role to investigate the situations which are called 'Oligopoly Situations' which involve explicit or implicit collusion between firms. Then the Competition Commission decides if the monopoly is acting against the public interest or not. And if they find a firm with a monopoly situation they
Both of these moves broke the monopoly. The Canadian government broke Bayer's monopoly and the second company moved into the market, creating a temporary oligopoly. The influx of Cipro from Mexico represented a substitute product, thereby breaking Cipro's American monopoly. This lowered the price of the drug until demand subsided -- note that it was demand that subsided and not supply. This despite the fact that the monopoly-granting patent protection
Our semester plans gives you unlimited, unrestricted access to our entire library of resources —writing tools, guides, example essays, tutorials, class notes, and more.
Get Started Now