David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

8.9 Monopoly and technical change
from previously sold units. Hence the demand curve
is the marginal revenue curve under perfect price
discrimination. The marginal revenue of the last unit
is simply the price for which it is sold.
Treating DD as the marginal revenue curve, a
perfectly price-discriminating monopolist produces
at point C, where marginal revenue and marginal
cost are equal. Two points follow immediately. First,
if price discrimination is possible, it is profitable to
use it. Moving from the uniform pricing point A to
the price discriminating point C, the monopolist adds
the area ABC to profits. This is the excess of extra
revenue over extra cost when output is increased.
The monopolist makes a second gain from price
discrimination. Even the output Q1 now earns more
revenue than under uniform pricing. The monopolist
also gains the area EP1A by charging different prices
on the first Q1 units of output rather than the single
price P1• In practice, one of the main ways management
consultants raise the profits of firms that they
advise is by devising new ways in which the firm can
price discriminate.
Second, whether or not the firm can price discriminate
affects its output choice. Uniform pricing leads to an
output Q1• Perfect price discrimination leads to an
output Q2• Uniform and discriminatory pricing lead
to different outputs because they affect the marginal
revenue obtained by a monopolist from a given
demand curve.
0
MR :
I
I
02
Output
Charging all customers the same price the monopolist will
produce at B where MC = MR. If each output unit can be
sold for a different price the revenue from existing units
is not reduced by cutting the price to sell another unit.
The demand curve DD is the marginal revenue curve
and the perfectly discriminating monopolist will produce
at C. Output is higher and profits are higher. By price
discrimination the monopolist gains an extra revenue EP1A
from selling Q1 but also increases output beyond this level
making a marginal profit of ABC in expanding from Q1 to Q2.
Figure 8.15
Perfect price discrimination
Perfect price discrimination is normally not feasible in reality. In order to perfectly discriminate, the
monopolist should know the willingness to pay of each consumer, information that is impractical to obtain.
Nevertheless, perfect discrimination gives an interesting result. If the monopolist can perfectly discriminate,
the social loss associated with a monopoly disappears. The social surplus under a monopoly that perfectly
discriminates is the same as under perfect competition. However, the distribution of the social surplus is
completely different in the two cases. Under perfect competition the producer surplus is zero, while the
social surplus coincides with the consumers' surplus. For a perfectly discriminating monopolist, the
reverse is true. The perfectly discriminating monopolist extracts the entire consumers' surplus, and so
the social surplus coincides with the producer surplus (the profits of the monopolist).
M_o_n_op_o_ly_a_n_d_te_ ch _n_i c a_l_ ch _a_ng_e
Section 8. 7 compared a monopoly and a perfectly competitive industry. When such a comparison was
meaningful, we discovered: (1) a monopoly will restrict output and drive up prices, and (2) a monopoly
may make economic profits permanently.
Joseph Schumpeter (1883-1950) argued that this comparison ignores technical advances that reduce costs,
allowing price cuts and output expansion. A large monopolist with steady profits may find it easier to fund
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