Question

In this module, you’ve learned a lot about monopolies and how they impact prices. In many industries, such as construction and home repairs, prices are set individually for each customer, rather than according to a posted price list. In your initial post to this discussion, address the following prompt based on what you’ve learned in this module:

Explain why such firms might be able to engage in price discrimination.

If you were hiring such a firm, what should you do to obtain the lowest possible price?

Answer 1

A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity. This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly which consists of a few sellers dominating a market.

The price discrimination is the action of charging different groups of consumers different prices.  A monopolist engages in the price discriminatiin  whenever it is possible in order to capture the consumers surplus and increases his profit.

Price discrimination happens when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs of supply.

The main conditions required for discriminatory pricing:

Differences in price elasticity of demand:There must be a different price elasticity of demand for each group of consumers. The firm is then able to charge a higher price to the group with a more price inelastic demand and a lower price to the group with a more elastic demand. By adopting such a strategy, the firm can increase total revenue and profits (i.e. achieve a higher level of producer surplus). To profit maximise, the firm will seek to set marginal revenue = to marginal cost in each separate (segmented) market.

Barriers to prevent consumers switching from one supplier to another: The firm must be able to prevent "consumer switching" – i.e. consumers who have purchased a product at a lower price are able to re-sell it to those consumers who would have otherwise paid the expensive price.