Question

There are 2 separate markets for a good. Market 1 is monopolized by firm A and Market 2 is perfectly competitive.

Firm A then monopolizes Market 2 by merging all incumbents, and uses 3rd degree price discrimination.

Assuming Cm < c, explain whether the merger will make the consumers better off in either market or both market.

Answer 1

Third degree price discrimination results in higher consumer surplus in Market 2.
reason: Hitherto perfect competition, now changes to monopoly with third degree price discrimination by a seller with lower costs than perfect competition.
Under third degree price discrimination, the seller charges different prices to different groups of consumers like students, senior citizens, kids, etc. The seller will sell to the last segment at a price even lower than the competitive price ( because his costs are lower).

While in market 1, trade will be the same as before.
(the question does not say there is price discrimination in market 1. If there is, then consumer surplus will increase in market 1 too).