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182 Fighting the Diseases of Poverty
Figure 5 Perfect market segmentation
P
Pmax
P1
P2
P3
S
Pmin
D
Q
Q
If a supplier has an element of market power (for example as a result
of the temporary market exclusivity conferred by a patent), then in
principle he is able to set prices and will do so in such a way as to
maximise profits. The textbook economics analysis of such situations
assumes that the supplier will choose only one price, which
will be higher than the marginal cost of production. However, if the
supplier is able to segment the market perfectly, then he will sell at
a wide range of different prices to different consumers and will
maximise profits by setting the minimum price (Pmin) at which he
sells just above the marginal cost of production and the maximum
price at Pmax. He will then sell total quantity Q, which is the same
as the perfectly competitive quantity. This is shown in Figure 5.