Consider a monopolist that is able to distinguish between two distinct market segments, A and B, for its product. Marginal cost is constant at $100 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 $85 and marginal revenue in segment B is $105. Is this firm maximizing its profit?

Question

Quizplus · Accepted Answer

This firm is not maximizing its profit because it has the ability to price discriminate across the two market segments. By charging a higher price to segment B, the firm can capture some of the consumer surplus that would have been given up if it charged a lower price to both segments. This would increase the firm's profits beyond what it is currently earning. Therefore, the best option for this firm is to engage in price discrimination.

Consider a Monopolist That Is Able to Distinguish Between Two