Consider a monopolist that is able to distinguish between two distinct market segments, A and B, for its product. Marginal cost is constant at $18 for each unit produced. The firm is currently selling its output at a single price and allocating its output across segments such that marginal revenue in segment A is $25 and marginal revenue in segment B is $15. Is this firm maximizing its profit?

Question

Quizplus · Accepted Answer

The firm is currently not price discriminating and selling its output at a single price. However, since it is able to distinguish between two distinct market segments, it can increase its profits by price discriminating across the two market segments. Price discrimination would allow the firm to charge a higher price in segment A where marginal revenue is higher ($25) and a lower price in segment B where marginal revenue is lower ($15). This would increase the firm's profits compared to selling at a single price where it is currently leaving potential profits on the table. Thus, the firm is not currently maximizing its profit and can increase its profits by price discriminating.

Consider a Monopolist That Is Able to Distinguish Between Two