Price Discrimination profitable when Elasticities Differ
The monopolist will find it profitable to charge discriminating prices. on the other hand. when the elasticities of demand in the two markets arc different. Rather. this is the only way for him to maximise profits. In case he charged a single price in the two markets. his profits will not be maximum. But if elasticity of demand is different in the two markets. he would charge higher price in the market wherc elasticity is low and low price where it is high. When elasticity of demand at the single monopoly price are different in the twu markets. the marginal revenue will also he different. The marginal revenue in the market with higher elasticity of demand is greater than the marginal revenue in the market where elasticity is lower. It will be obviously worthwhile for the monopolist to transfer some units of the commodity from the market where elasticity is high. By such a transfer he will he increasing his profit. The \market from which the uuits arc transferred will experience a rise and tflC market to In this diagram, elasticity of demand is greater in market B than it is in market A. This is indicated by the slope of the AR curves (ARb has a greater slope). . In market B. marginal revenue M2 S2 is greater than marginal revenue M, S, in Market A. Now if sale in the market A is reduced by N, M, the loss in revenue (M, S, T, N,) is much less than the gain (M2 S2 T2 Nz) in market B by increasing sales thereby M2 N2. It can be seen that, when M, N, units are withdrawn from market A. the price rises from OP to OP ‘, On- the other hand. when M2N2 units are added in the market B, the price falls from OP to OP”. That is, now the monopolist is charging different prices in the two markets as against one single price OP before and we see that his profit has increased thereby. Shifting of units of the commodity from market A to market B will continue till marginal revenues in the two markets are equalised, the profit will have been maximised and there will be no further shifting. This is so because, so long as MR is higher in market B, the monopolist will be adding more to his revenue than his loss in market A by transferring some amount of goods from A market to B market.
[av_button label='Get Any Economics Assignment Solved for US$ 55' link='manually,http://economicskey.com/buy-now' link_target='' color='red' custom_bg='#444444' custom_font='#ffffff' size='large' position='center' icon_select='yes' icon='ue859' font='entypo-fontello']