Price Discrimination and Output
Our second proposition relates to how price discrimination affects the
level of output:
A profit-maximizing monopolist that price discriminates among units will produce more
output than will a single-price monopolist.To understand this second proposition, remember that a single-price
monopolist will produce less than would all the firms in a perfectly
competitive industry (recall Figure 10-3 ). It produces less because it
knows that selling more depresses the price. Price discrimination allows it
to reduce this disincentive. If the firm can sell its output in separate
blocks, as shown in Figure 10-6 , it can sell another block without
spoiling the market for blocks that are already sold. If each unit can be
sold at a separate price, the profit-maximizing monopolist will produce
every unit for which the price charged is greater than or equal to its
marginal cost. In general, therefore, a price-discriminating monopolist
will sell more output than a single-price monopolist.
This second proposition has implications for market efficiency, a concept
we introduced in Chapter 5 and reviewed earlier in this chapter. Recall
that a single-price monopolist produces at a level of output at which price
exceeds marginal cost. Thus, society would benefit from having more of
the good produced because the marginal value of the good to society (as
reflected by its price) exceeds the marginal cost of the good. Put
differently, a higher level of output would lead to more economic surplus
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