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A discriminating monopoly is an entity charging different prices for its services or products in different markets or consumers. The prices are usually not associated with the cost of the product or service provision. A company operating as a discriminating monopoly using its position in market control has the leverage of doing this by provided there are variations in the price elasticity of demand markets or consumers and barriers, thereby preventing consumers or customers from attaining arbitrage profitability by selling the products or services amongst themselves. Therefore, by ensuring that every consumer need is catered for, the monopoly, in turn, achieves maximum profitability (Brickley, Smith & Zimmerman, 2015).
Usually, when there are two or more market segments, and each experiences a difference in the price of the product or service charged by the monopolist, the monopolist must equate the marginal revenue with the marginal cost of each market segment. Marginal cost refers to the change in the total change in a product's production cost that results from the production of an additional unit. It is calculated by obtaining the change in production cost, divided by the change in quantity. If the marginal cost of the production of the extra unit is lower than the per-unit price, then there is a potential for making profits. Marginal revenue, on the other hand, describes the total revenue generated by the extra unit produced.
Discriminating monopolies operate in a variety of ways and are influenced by certain factors. For instance, the different prices of products and services can be established based on factors including the location and demographics of the firm's customer or consumer base. For example, the price of a product in a rich environment will potentially be higher than the price of the same product in an environment with lower-income consumers. Other factors affecting monopolists' product and service pricing also include holidays and major sporting events. This is because such events come with an increased demand for products due to the increased visitor influx.
Therefore, by targeting every consumer, the monopolist can make higher economic profits. Hence, price discrimination can only be achieved through the status of a monopolist firm to control production and pricing without competition. The main advantage associated with the price discriminating monopoly is that it increases the chance of maximizing profits. This happens when the monopolist charges different prices to different consumers in the different market segments. Sometimes it makes sense to charge lower prices to some consumers, provided that the price remains greater than the marginal cost.
This meets the condition for allocative efficiency in microeconomics; that is, a product should be...…the monopolistic firm has generated higher profits by charging different prices to the two market segments. Also, from the calculations, the optimal prices result from setting the marginal revenue to be equal to the marginal cost in each of the segments and then solving for Q. price is then found from the equation for the demand curve for each segment (Brickley, Smith & Zimmerman, 2015).
Calculations
Profit is maximized at the output quantity where marginal cost equals the marginal revenue. As stated earlier, the marginal revenue is the change in the revenue associated with adding an extra unit. In contrast, the marginal cost is associated with the change in the cost for the added unit. Hence, both the MC and the MR derivatives of the total cost and revenue functions, respectively.
Pie (QA, QB) = TRA (QA) + TRB (QB)-TC (QA+QB) = PA.QA + PB.QB-TC (QA+QB)
This results to;
Pie= (18-2QA) QA + (9-QB) QB (QA+QB) 2/4
Change in price/change in QA = 18-QA- (QA+QB)/2= 0
Change in price/change in QB= 9 2QA- (QA + QB)/2= 0
The profit-maximizing combination of the Qs has to satisfy the MR=MC.
QA is therefore equal to 6, while QB is equal to 6, and the respective prices are PA = 6 and PB = 3
The total profits are obtained by adding the profits generated by each market…
Reference
Brickley, J., Smith, C., & Zimmerman, J. (2015). Managerial economics and organizational architecture. McGraw-Hill Education.
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