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

The firm can increase its profits by price discriminating across the two market segments. Currently, it is selling at a single price and allocating its output across segments based on marginal revenue. However, if it can distinguish between the two market segments, it can charge a higher price in segment B as the marginal revenue is higher. This will allow the firm to capture a larger share of the consumer surplus in segment B and increase its profits. Thus, the firm is not currently maximizing its profits and can do so by price discriminating across the two market segments.

Consider a Monopolist That Is Able to Distinguish Between Two