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### Course: AP®︎/College Microeconomics>Unit 4

Lesson 3: Price discrimination

# Monopoly price discrimination

Price discrimination is charging each consumer their entire willingness to pay. What if a monopolist can charge each buyer their entire willingness to pay? Learn about the effect of perfect price discrimination on output and deadweight loss in this video.

## Want to join the conversation?

• At the end of this video, Sal states that the extreme example of a firm using price discrimination is allocatively efficient (AE) because, "MR = MC." I found this confusing because all profit-maximizing firms produce where MR=MC, but it's not necessarily AE. What would be a better phrasing/explanation for why it's AE? Thanks! (: #KhanRocks
• Allocative efficiency occurs when resources are allocated in such a way that the quantity of goods produced meets the quantity of goods consumers are willing and able to buy at a price that reflects the marginal cost of production. In the extreme example of perfect price discrimination, the monopolist is able to charge each consumer their maximum willingness to pay, which corresponds to the consumer's marginal benefit. When the monopolist produces up to the point where marginal revenue (MR) equals marginal cost (MC), it is producing the quantity where the marginal benefit to consumers equals the marginal cost of production. Hence, the monopolist is achieving allocative efficiency because it is producing the quantity where societal welfare is maximized, even though the price exceeds marginal cost for each consumer.
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• When there is some price discrimination, but it's not perfect, what will happen to the MR curve? Will its slope be somewhere in between 1 and 2 times steeper that the demand curve?
• When a firm engages in imperfect price discrimination, the MR curve will be somewhere in between the demand curve and the MR curve of perfect price discrimination. The exact slope of the MR curve will depend on the extent and effectiveness of the price discrimination strategy. If a firm is able to segment the market and charge different prices to different groups of consumers based on their willingness to pay, the MR curve will be steeper than the demand curve but not as steep as the MR curve under perfect price discrimination. The slope of the MR curve will reflect the firm's ability to capture consumer surplus through price discrimination, and the degree to which it can do so will determine the efficiency of its pricing strategy.
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• Why there is deadweight loss?
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• why does price discrimination achieve allocative efficiency even when P is not equal MC? Understand that there is no dead weight loss here.
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• Allocative efficiency occurs when resources are allocated in a way that maximizes societal welfare, and this is achieved when the quantity produced is where marginal cost (MC) equals marginal benefit (MB). In the case of price discrimination, even though the price charged to each consumer does not necessarily equal the marginal cost of production, the monopolist is still producing up to the point where marginal revenue (MR) equals marginal cost (MC) for each unit. This means that the monopolist is producing the quantity where the value consumers place on the last unit produced (MB) equals the cost of producing that unit (MC). Since there is no deadweight loss in this scenario, the monopolist is achieving allocative efficiency by maximizing total surplus, which includes both consumer and producer surplus.
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• At , Sal said "change the same" when I think he meant to say "charge the same."