Explain how a monopolist can increase profits by price discriminating. What are the conditions necessary for price discrimination?
What will be an ideal response?
A monopolist can increase profits by price discriminating, in which case it sells some units at a higher price and other units at a lower price. It sells to those whose demand for the good is relatively inelastic at a higher price and to those whose demand is relatively elastic at a lower price. To discriminate, the firm must have monopoly power, it must be able to distinguish different markets, and buyers in those markets must have different elasticities of demand. Finally, the monopolist must be able to prevent the lower-priced consumers from reselling the good in the higher-priced market.
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