Question

Does a monopoly's ability to price discriminate between two groups of consumers depend on its marginal cost curve? Why or why not? Consider two cases: (a) the marginal cost is so high that the monopoly is disinterested in selling to one group, and (b) the marginal cost is low enough that the monopoly wants to sell to both groups.

Answer 1

Yes, a monopoly's ability to price discriminate between two groups of consumers depends on its marginal cost curve. This is because the monopoly will only sell to both groups if selling to each is separately profitable, and marginal cost curve will define the cost, which in turn will decide the peofit. Also, the firm is able to charge the maximum possible price for each unit which enables the firm to capture majority of available consumer surplus for itself.

a) If the marginal cost is so high that the monopoly is disinterested in selling to one group, then there will be no instance of price discrimination as low end consumers don't buy the product at all, and the firm would have to sell the product to only one group.

b) In a situation where marginal cost is low enough that the monopoly wants to sell to both groups, it should operate under standard profit maximization, i.e. MR = MC condition should be satisfied in both the markets combines to maximize the profit.