Question

a) In your own words or using an example, describe each condition and its relevance for the three conditions for profitable price discrimination (1. have market power, 2. be able to identify submarkets, and 3. be able to separate submarkets).

b) Suppose a perfectly price-discriminating firm faces demand function:

? = 22 − ?

And has cost function: ? = 25 + 4? + (1 /2) ?^2

Identify the quantity he sells, the price(s) he charges, and the profits he attains. Also, solve for this firm’s quantity, price, and profit under uniform pricing. Verify that perfect price discrimination increases profit and total surplus relative to uniform pricing.

Answer 1