Discuss if a price discriminating monopolist would be preferred over a firm in a perfectly competitive market.

INTRODUCTION:

1. Define Price discrimination. Comparison of price discriminating monopolist and a perfectly competitive firm is made on the basis of efficiency, innovation and equity

II. DEVELOPMENT

  1. Explain why a price discriminating monopolist would be preferred over a firm in a PC market.

Presence of economies of scale:  In a price discriminating monopoly EOS  leads to lower unit cost of production. Lower AC and lower MC.

 Provision of goods: Price discrimination allows goods which would otherwise not have been produced due to high costs to be manufactured.

Dynamic efficiency : An industry is dynamically efficient if firms in the industry have the incentive to undertake R&D activities in product and process innovations.

  • Explain why a price discriminating monopolist is not necessarily preferred over a firm in a PC market

Both the PC and the first degree price discriminator achieve allocative efficiency: PC industry produces at the point where D = S and all firms are producing where P=MC in long run.  1st degree PD monopoly produces where P = MC. 

PC market will be preferred over price discriminating monopolist :

Loss of consumer surplus: The main cost to society arising from price discrimination is the loss of consumer surplus to the producers. From society’s point of view, this transfer of surplus from the consumers to the producer worsens income distribution. Evaluate.

X-inefficiency:

CONCLUSION:

Provide an overall judgement whether it is likely that a price discriminating monopolist is preferred over a PC industry.