Price-output Equilibrium ill Discriminating MONOPOLY
We have studied already how price and outputare determined under conditions of simple monopoly.In the simple monopoly, a single price is charged for the whole output. But as explained above in discriminating monopoly, different prices are charged for a commodity. We shall now see how a monopolist decides the output to be produced under price discrimination and how he sets different prices for a commodity. First of all, the ~onopolist divides his total market into sub-markets. The monopolist can divide his total market into several sub-markets but we shall explain the case of two sub-markets only. There is no difference in analysis even if the sub-markets are many rather than two. Our analysis can, therefore. easily be extended to cover several sub-markets. Price discrimination by the monopolist has been illustrated in Figs. 28.9 (0). (b) and (c). In these figures, e see that the monopolist has divided his total market into sub-markets A and B on the basis of elasticity of demand for the product in these two markets. Elasticity of demand is greater in market B than in market A. In market A, AR’ is the average revenue curve and MR’ is the corresponding marginal revenue curve. Similarly AR” an~ MR” are the average revenue and marginal revenue curves respectively in market B. CMR is the combined marginal revenue curve. CMR has been obtained by the lateral summation of MR’ and MR”, MC is the marginal cost curve of the total output of the product. The discriminating monopolist has now to decide what level of output he should produce. Like every other producer. he aims at maximizing his profits. As elsewhere. his profits will be maximum, and. hence he will be in equilibrium position, at the output at which MR = MC, and MC curve cuts the MR curve from below.Itis evident from Fig. 28.9 (c) that equilibrium of the discriminating monopolist is established at the output OM at which MC cuts CMR.
Now the output OM has therefore to be distributed between the two markets in such a way that marginal revenue in each is equal to ME which is the marginal cost. being on the MC curve. Therefore. he will sell output OMI in market A. because only at this output marginal revenue MR’ in market A is equal toME (M IE’ = ME). The price charged in the market for output OMI is equal to MI PI PI being on the average revenue (AR’) or demand curve. The output OM2 will be sold in market B as only at this output. marginal revenue in market B. that is MR” is equal to ME (M2E” = ME). Price charged in market B for output OM2 is M2 P2 which is lower than the MI P I which is charged in market A. Thus. in market B in which elasticity of demand is greater, the price charged is lower than that in market A, where the elasticity of demand is less. Hence, for the discriminating monopolist to be in equilibrium the following two conditions must be satisfied:
(i) Marginal Cost of Total Output = Combined Marginal Revenue.
(ii) Marginal Revenue in Market A = Marginal Revenue in Market B = Marginal Co