Question

This discussion focuses on how a price-discriminating monopolist can earn even higher profits than a monopolist charging a single price. The example uses an imaginary time machine to look at monopoly profits and consumer surplus.  

The demand for time travel is shown below:

“Steve” wants to travel back in time to see the dinosaurs; he is willing to pay as much as $200 to use the time machine.“Joyce” wants to relive this entire semester; she is willing to pay up to $150 to use the time machine.“Chip” can’t wait for the semester to end; he is willing to pay as much as $125 to use the time machine.“Dawn” just wants to get through this class period; she is willing to pay up to $100 to use the time machine.

 The demand curve for time travel is:

                 Price                   Quantity

                 $200                       1

                   150                       2

                   125                       3

                   100                       4

 

For simplicity, let the marginal cost of time travel be constant at $100. What would be the equilibrium quantity for a perfectly competitive market? What quantity would be chosen by a monopolist? What advantage would the monopolist experience using perfect price discrimination? What is your take-away from this analysis?

Answer 1

A perfectly competitive firm optimizes where the price is equal to marginal cost. Thus it will set Price = 100. Thus the quantity would be 4.

The monopolist, on the other hand, equates MR with MC.

We can see that MR=MC = 100 happens at quantity = 2.

A perfect price discrimination means charging each consumer a price that is equal to his/her willingness to pay. It means charging first consumer 200, second consumer 150 and so on. In this way, the monopolist is able to appropriate all the consumer surplus as the profits. In this way, the equilibrium quantity is same as perfect competition.