Chapter 12: Capturing Surplus

- Producer surplus that monopolist captures = area G + H + K + L

- Consumer surplus = area E + G
3 types of price discrimination (charging consumers different price
for the same good/service to capture more consumer surplus)
1. First degree attempting to price each unit at the consumers
reservation price (maximum price consumer is willing to pay)
eg. An auction
2. Second degree offering quantity discounts
3. Third Degree charging different uniform prices to different
consumer groups/segments of the market as they have different
demand curves resulting from different PED eg. Airline charges
vacationers and businessmen differently.
Market features needed for a firm to price discriminate
- Market power demand curve must be downward sloping. No
horizontal demand curves. Must have market power, not
necessarily monopoly power
- Information on the amount each consumers willing to pay must
know reservation prices/PEDs of consumers
- No arbitrage/resale no middleman allowed. Middleman captures
consumer surplus
First Degree Price Discrimination
- demand curve = consumers willingness to pay
- with 1st degree price discrimination, firms always produce up to
MC = D
At MC=D (Point B):

Second Degree Price Discrimination

-

no consumer surplus
producer surplus = all coloured
areas
no deadweight loss
firms would not produce past
MC = D since MC would > the
price for additional units
the MR MR=P+