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Monopoly Price discrimination takes place when a given product is sold by a monopolist at more than one price and these price differences are not justified by cost differences.

The purpose of monopoly price discrimination by a monopolist is two fold. Firstly, to increase his total revenue and profits and secondly, to produce a larger output than a non-practicing monopolist.

Price discrimination is possible and profitable when the monopolist is able to control the amount and distribution of supply and the buyers can be separated into different classes having a demand curve with different elasticities.

Example:

Lets take an example, the monopolist sells his total product in two sub-markets A and B. Sub-market A has low price elastic demand for the product and the sub-market B has high price elasticity of demand. The discriminating monopolist will sell a greater quantity of his product by making a price reduction in market B. He sells lesser commodity in market A at a price higher than in market B.

The monopolist will then earn maximum profit (output) by price discriminating as is illustrated with the help of diagram given below.

Diagram:

In this figure (16.7) market A and Market B have different elasticity of demand for the product of the monopolist. The slopes of the AR and MR curves in each market are different depending upon the elasticity of demand for the commodity.

In market A, the elasticity of demand is relatively inelastic. The rise in price does not cause a much fall in demand. In market B, the demand for the monopolist product is relatively elastic.

A reduction in price leads greater increase in the demand for the product and adds more to the revenue. In figure, the combined marginal cost curve (MC) of the total output of the monopolist intersects the combined marginal revenue curve of the two markets A and B from below at point P. The best levels of output of the monopolist is OT given by the point P where MC curve cuts the AR curve from below. The monopolist Is to distribute this equilibrium output OT between the two markets A and B in such a way that the MR in each market is OP.

In market A, MR equates MC at point F. The monopolist sells output OB at price KB. In market B, where the demand is more elastic, the monopolist maximizes profit by selling output OB2 at price K2B2 in market B, where the demand is more elastic, the price K2B2 is lower than in market A, the profit of the monopolist is maximum when he sells output of OB at price KB in market A and output of OB2 at price of K2B2 in market B. The monopolist total profit is shown in the shaded area APE in figure 16.7 (c).

Summing up, a discriminating monopolist can maximize profits only when:

(1) It is profitable for him to sell the output in different markets.

(2) The price is charged in different markets in such a way that the last unit of the commodity sold in market gives the same marginal revenue.

(3) The marginal revenue is equal to the marginal cost of total output.