More Production

Other things being equal, the monopolist practising perfect price discrimination will produce a larger output than the monopolist that does not. When the non-discriminating monopolist lowers its price to sell additional output, the lower price

CHAPTER TEN • PURE MDNDPDLY

not only applies to the additional output but also to all the prior units of output. So the single-price monopolist's marginal revenue falls more rapidly than price and, graphically, its marginal-revenue curve lies below its demand curve. The decline of marginal revenue is a disincentive to increased production.

When a discriminating monopolist lowers its price, the reduced price applies only to the additional units sold and not to the prior units. Thus, marginal revenue equals price for each unit of output and the firm's marginal revenue curve and demand curve coincide. The disincentive to increased production is removed.

We can show the outcome through Table 10-1. Because marginal revenue and price are equal, the discriminating monopolist finds it profitable to produce seven units, not five units, of output. The additional revenue from the sixth and seventh units is $214 (= $112 + $102). Thus, total revenue for seven units is $924 (= $710 + $214). Since total cost for seven units is $640, profit is $284.

Ironically, although perfect price discrimination results in higher monopoly profit than that achieved by a nondiscriminating monopolist, it also results in greater output and thus less allocative inefficiency. In our example, the output level of seven units matches the output that would have occurred in pure competition; that is, allocative efficiency (P = MC) is achieved.

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