Question

Explain why monopoly sellers usually offer discount prices to buyers who are willing to mail in a rebate coupon or endure some other type of inconvenience.

Answer 1

Generally a Monopoly does not have information about its buyers type specially about their elasticity of demand. However it realises that there are certain groups of consumers with inelastic demand and they are likely to pay even a higher price. For groups that have elastic demand price is likely to be low because otherwise they will not be able to purchase

Monopoly usually charges uniform price from all its customers but then profit can be further maximized if price discrimination is used where different consumer groups are charged different prices according to their willingness to pay and elasticity of demand. Those consumers who are likely to mail in a rebate coupon are the ones with elastic demand because they are not able to pay a higher price at the Monopoly is charging.

By offering them discount, Monopoly can increase its profit because now it will have two different consumer groups to serve. In this way discount increases Monopoly profit