Question

Explain why a firm can earn more profit by price discrimination than from setting a uniform price.

Answer 1

If a firm sets a uniform price, only those consumers wil purchase whose willingness to pay is greater than the uniform price. These consumers are able to get consumer surplus due to difference in willingness to pay and uniform price. However, if it price discriminates then it will be able to charge the willingless to pay of the consumer. So it takes away all consumer surplus from the consumer and translates it into profit. Moreover, a greater quantity is also sold. Instead of equilibrium at point MR = MC, equilibrium is at P = MC. Hence, price discrimination leads to higher profit.