Discuss the differences between perfect and imperfect price discrimination and the benefits of each to a monopolist.

Question

What will be an ideal response?

Answer 1

Perfect price discrimination is possible when a monopolist knows the consumer's willingness to pay for every unit he sells and can charge a different price for each unit. Perfect price discrimination maximizes aggregate surplus, although consumers receive no surplus at all. Price discrimination allows a monopolist to maximize profits by using a two-part tariff in which the per-unit price equals the marginal cost and each consumer pays a fixed fee that eliminates consumer surplus. Perfect price discrimination is often not possible because a monopolist does not know the consumer's willingness to pay for each unit. A monopolist can still price discriminate based upon observable customer characteristics or based upon self-selection, each of which are forms of imperfect price discrimination. Imperfect price discrimination can still increase monopoly profits above that of a single pricing scheme.