Profits can be increased by price discrimination. A single-price
monopolist produces where output is and price is
this case, profits are the light shaded area, and consumers receive
consumer surplus given by the entire area above and below the
demand curve.
Price discrimination transfers some of this consumer surplus to the firm.
Suppose the firm keeps output constant at but is able to charge
different prices for different blocks of units. For example, it might charge
for the first units, for the next block of units up to for the
next block of units up to and for the remaining units up to
(The firm would expand output beyond if it could offer even more
prices, but we simplify here to focus on the transfer of surplus with
unchanged output.) In this case, the firm’s costs have not changed but its
revenues have increased by the dark shaded area. Since costs have not
changed, the increase in revenue earned by price discrimination also
represents an increase in profits for the firm. Consumer surplus has been
reduced to the unshaded triangles just below the demand curve.
MR=MC, Qm, p
pmQmp 1 Q 1 p 2 Q 2 ,p 3
Q 3 , pm Qm
Qm