Question

1. What happens to market price, quantity, and total surplus when several competing firms in a market merge and become a monopoly?
2. What happens to market price, quantity, and total surplus when a monopolist is broken up into several competing firms?
3. What is price discrimination? Give an example?
4. What three things are necessary for a firm to practice price discrimination?

Answer 1

Ans) 1) When several small firms merge to form a monopoly, competition is hindered and firms gain the pricing power. Due to which, they produce less quantity and charge higher prices. This reduces consumer surplus and also creates deadweightloss (as less quantity than socially optimal quantity is sold.). Due to decrease in consumer surplus and creation of deadweightloss, total surplus reduces .

2) When monopoly breaks into several smaller entities, competition increases. Due to increase in competition, price decreases and quantity increases ​​​​​​. Due to decrease in price, consumer surplus increases and deadweightloss decreases or is totally removed. As a result, total surplus increases ​​​​​​.

3) Price discrimination is the practice of charging different price from different groups. This enables monopolist to increase their revenue. Eg- movie theatre offers discounts to elderly as their demand elasticity is more.

4) For a firm to practice price discrimination ÷

• It should have market power.
• Ability to identify different market sections with different demand elasticity or willingness to pay.
• Resale can be prevented.
• Ability to separate different groups.