# Question about consumer surplus and price discrimination

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#1

In my economics book it shows the combined demand curve (AR) as a kinked curve. I understand the kinked model of demand but this doesn’t make sense in the context of price discrimination, can someone just explain what’s going on in the graphs?

If you can’t see the picture lmk

Thanks
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1 year ago
#2
I think these diagrams are illustrating how price discrimination benefits the firm.
in the two diagrams on the left, consumer surpluses in separate markets are shown by shaded area, so is combined market's consumer surplus in the last diagram. you can see CS is much bigger in combined market than CS of separate markets combined (btw note that quantity is set at the level which MC=MR in order to maximize profit), which means, as explained in the highlighted part, firms can gain more PS and profit from price discrimination. thus in this case rational decision by the firm will lead to price discrimination.
This is an example of third degree price discrimination in which firms make use of different demand elasticities among consumer groups. It is only worth undertaking if the profit from separating the markets is greater than from keeping the markets combined, and this will depend upon the relative elasticities of demand in the sub-markets.
I think that was the whole point of these diagrams, if it still doesn't make sense don't hesitate to ask in more detail.
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#3
(Original post by scottishpenguin)
I think these diagrams are illustrating how price discrimination benefits the firm.
in the two diagrams on the left, consumer surpluses in separate markets are shown by shaded area, so is combined market's consumer surplus in the last diagram. you can see CS is much bigger in combined market than CS of separate markets combined (btw note that quantity is set at the level which MC=MR in order to maximize profit), which means, as explained in the highlighted part, firms can gain more PS and profit from price discrimination. thus in this case rational decision by the firm will lead to price discrimination.
This is an example of third degree price discrimination in which firms make use of different demand elasticities among consumer groups. It is only worth undertaking if the profit from separating the markets is greater than from keeping the markets combined, and this will depend upon the relative elasticities of demand in the sub-markets.
I think that was the whole point of these diagrams, if it still doesn't make sense don't hesitate to ask in more detail.
I understand it much better now thanks so much. Now it’s just understanding why the elasticities are combined like that, for instance what would happen if you put the female elasticity first and then the male one, what would happen to CS?
Moreover how would you indicate producer surplus on each of the diagrams, would you just say that the MC curve is the equivalent to the supply curve?
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1 year ago
#4
(Original post by hustlr)
I understand it much better now thanks so much. Now it’s just understanding why the elasticities are combined like that, for instance what would happen if you put the female elasticity first and then the male one, what would happen to CS?
Moreover how would you indicate producer surplus on each of the diagrams, would you just say that the MC curve is the equivalent to the supply curve?
that's good.
okay, let's dive in and explain one by one. the reason why they are combined like that is because firm will choose more profitable option at any given quantity. firms gain more revenue at higher price and smaller quantity when demand is inelastic whereas when demand is elastic firm's revenue increases when they sell more at cheaper price. therefore it does not make sense for them to draw female demand curve (which is more elastic) first and male demand curve (more inelastic) later.
for producer surplus, there is no way to illustrate producer surplus. this is because we assume monopolist MC is constant across all markets for simplicity in principle level textbook (btw firms need to be a monopolist to gain benefit from price discrimination). however, it is possible to indicate the profit of the firm by looking at the rectangle made by p and q above the MC curve. in that sense you could probably see sum of profits in separate markets is bigger than that of combined market which should incentivise the firm to price discriminate.
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#5
(Original post by scottishpenguin)
that's good.
okay, let's dive in and explain one by one. the reason why they are combined like that is because firm will choose more profitable option at any given quantity. firms gain more revenue at higher price and smaller quantity when demand is inelastic whereas when demand is elastic firm's revenue increases when they sell more at cheaper price. therefore it does not make sense for them to draw female demand curve (which is more elastic) first and male demand curve (more inelastic) later.
for producer surplus, there is no way to illustrate producer surplus. this is because we assume monopolist MC is constant across all markets for simplicity in principle level textbook (btw firms need to be a monopolist to gain benefit from price discrimination). however, it is possible to indicate the profit of the firm by looking at the rectangle made by p and q above the MC curve. in that sense you could probably see sum of profits in separate markets is bigger than that of combined market which should incentivise the firm to price discriminate.
Alright great so I made notes on it and I think I understand so correct me if I’m wrong
In the combined market there is an additional rectangle below the male consumer surplus and to the left of the female consumer surplus. This exist because males who don’t care about price (price inelastic) pay for a lower price anyways due to the females who do care about price (price elastic). That’s their welfare gained. However when splitting up the market and exploiting the male customers, the consumer surplus is eliminated as a result of exploitation, welfare is lost and is transferred over to the monopolists normal profit. Essentially in the firms eyes a consumer surplus is the inhibition of abnormal profits, so carving the market in a way that prices are delivered to certain strata will ensure profit is maximised to the extent of third degree discrimination.
However this “carving” process can become more and more specific until it targets specific customers, at this time the market can no longer be segmented any further, would it be correct that this is the true maximisation of a monopolists abnormal profit?
0
1 year ago
#6
(Original post by hustlr)
Alright great so I made notes on it and I think I understand so correct me if I’m wrong
In the combined market there is an additional rectangle below the male consumer surplus and to the left of the female consumer surplus. This exist because males who don’t care about price (price inelastic) pay for a lower price anyways due to the females who do care about price (price elastic). That’s their welfare gained. However when splitting up the market and exploiting the male customers, the consumer surplus is eliminated as a result of exploitation, welfare is lost and is transferred over to the monopolists normal profit. Essentially in the firms eyes a consumer surplus is the inhibition of abnormal profits, so carving the market in a way that prices are delivered to certain strata will ensure profit is maximised to the extent of third degree discrimination.
However this “carving” process can become more and more specific until it targets specific customers, at this time the market can no longer be segmented any further, would it be correct that this is the true maximisation of a monopolists abnormal profit?
yeah, I think the note is perfect. It's been my pleasure to be able to help you understanding economics. microeconomics can be very intricate and complex but good luck
0
#7
(Original post by scottishpenguin)
yeah, I think the note is perfect. It's been my pleasure to be able to help you understanding economics. microeconomics can be very intricate and complex but good luck
Thanks so much for your help honestly
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