Price and Output under Second and Third Degree Discrimination

Price and Output under Second Degree Discrimination

In discrimination of the second order, the monopolist is only able to obtain a portion of the consumer surplus. In other words, the monopolist sets different prices for various customer groups and for various quantities of the same commodity, but not the highest price that consumers may reasonably expect to pay. He will be able to charge a lower price than the consumers' maximum imaginable price while still giving them a portion of the surplus. The monopolist will offer the consumer multiple units for one price, multiple units at a lesser price, etc. The phrase "imperfect discriminating monopoly" was intended by Mrs. Joan Robinson. The following figure serves as an illustration of this.

Such markets with a large number of product buyers typically practice this kind of second-degree pricing discrimination. Because consumers' tastes and incomes vary, the monopolist can take a portion of the surplus generated by their customers depending on which consumers (or different groups of consumers) want to purchase the good.

Price and Output Determination under Third Degree Discrimination

In third-degree discrimination, the monopolist splits his customers into two or more classes, groups, or markets and charges various prices from various markets. In actuality, it happens frequently. This type of price discrimination takes the simplest form when a monopolist sells his previously created output in two different markets. His production costs can be disregarded because he has a certain amount of merchandise to sell. He can change the quantity in each market so that the marginal revenue from the first market equals the marginal revenue from the second market when he sells his output just in those two markets.

The discriminating monopolist must make two decisions in order to determine the production that would maximize profits: first, how much of the overall output should be created, and second, how much of this total output should be sold in the two submarkets and at what prices?

The monopolists will evaluate the aggregate or combined marginal revenue with the marginal cost of the output in order to maximize profits. Combining the marginal revenues of the two submarkets will yield the aggregate marginal revenue. According to figure C, AR1 and AR2 represent the average revenue curves for submarkets A and B, respectively. The marginal revenue curves for submarkets A and B are designated as MR1 and MR2, respectively. By combining MR1 and MR2 horizontally, or by summing the output corresponding to each level of marginal revenue in the two submarkets, we were able to create the aggregate marginal revenue (MR) curve. As a result, aggregate marginal revenue depicts the total amount of output that can be sold in the two submarkets combined in order to achieve this marginal revenue. The curve MC in figure C depicts the monopolist's marginal cost.

We can define the fundamental equilibrium conditions in the setting of a discriminating monopoly given this fundamental framework. The fundamental equilibrium requirements are:

• MC = ∑MR. It implies that the discriminating monopolist will produce at a level where MC equals the total marginal revenue in order to maximize his profits. In the context of price discrimination, this is the fundamental profit-maximizing rule.
• For a discriminating monopolist, it will be most lucrative to divide the total output produced in the two submarkets so that the two marginal revenues are equal. In the event that the two submarkets are not equal, the monopolist can always boost his profits by shifting output subunits from the submarket with the lower marginal revenue to the submarket with the higher marginal revenue. Therefore, profit maximizing in the setting of price discrimination demands that MR1 = MR2 = MC. This implies that in each of the two markets, MC must be equal to MR.

Reference

Koutosoyianis, A (1979), Modern Microeconomics, London Macmillan