Question

a. No price discrimination: Assuming Monopoly General Hospital (MGH) faces a downward sloping demand curve (i.e. not perfectly elastic/inelastic), and can only charge one price to all patients, briefly explain intuitively why its marginal revenue is always lower than the price for any given quantity of services demanded.

b. Perfect price discrimination: Now suppose instead that the MGH is able to charge each individual patient exactly her willingness-to-pay for its services, and does so (i.e. perfect Price Discrimination). What is the deadweight loss associated with this scenario? What is the consumer surplus? Why?

c. Imperfect price discrimination: Now suppose instead that MGH cannot ascertain individual patients’ willingness-to-pay, but knows that on average, patients with private insurance enrolled in DividedHealthCare (DHC) plans have a higher willingness-to-pay than those in Inhumana plans. MGH wants to maximize its profits from privately insured patients, and negotiates a different price with each insurer accordingly. Do you think this would lead to a deadweight loss in this market? Why or why not?

Answer 1

A. In absence of price discrimination, Monopoly General Hospital (MGH) charges one price to all patients. Moreover, it faces a downward sloping demand curve. For MGH being a monopoly, Its marginal revenue is less than price.
Answer: Monopoly General Hospital has to lower prices of its services in order to sell more units of services (output). That's why, its marginal revenue is bound to lie below the average revenue curve ( demand curve).

B. In case of perfect discrimination where Monopoly General Hospital charges each individual patient exactly their willingness to pay. Applying perfect price discrimination,
Answer: There is no dead weight loss and no consumer surplus as by charging the highest price according to patients' maximum willingness to pay, the Monopoly General Hospital extracts all of the economic surplus, leaving no consumer surplus and no dead weight loss.

C. In case of imperfect price discrimination, MGH wants to maximise its profits from privately insured patients ascertaining that DHC plans patients have higher willingness to pay than those in inhumana plans. Hence, MGH sets to apply price discrimination negotiating a different price according to their willingness to pay.
Answer: This would definitely lead to creating dead weight loss situation because when any monopoly sets the price way above the marginal cost, it creates inefficiency and dead weight loss occurs. Deadweight loss is the reduction of economic efficiency. Because MGH charges higher price than marginal cost, the patients are unable to get socially efficient output.