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Difficulty: EasyMonopoly: Price Discrimination Conditions, Types, and Effects

A monopolist can successfully practice third-degree price discrimination between two separated sub-markets even if the price elasticity of demand is identical in both sub-markets.

Answer: Answer

Answer

The statement is False. Differing price elasticities of demand between sub-markets are required for third-degree price discrimination.
The statement is false because a monopolist requires differing price elasticities of demand in separated sub-markets to charge different prices. When demand elasticities are identical, setting marginal revenue equal across sub-markets results in equal prices, meaning no price discrimination occurs.

Step-by-Step Solution

1
State the condition for profit maximization across separated sub-markets.
A monopolist maximizes total profit by setting marginal revenue in each market equal to marginal cost: MR1=MR2=MCMR_1 = MR_2 = MC.
Equating marginal revenue across markets ensures optimal allocation of sales.
2
Apply the relationship between price (PP), marginal revenue (MRMR), and price elasticity of demand (ee).
MR=P(1−1∣e∣)MR = P \left(1 - \frac{1}{|e|}\right).
This formula connects pricing power directly to market elasticity.
3
Evaluate the result when price elasticities of demand are identical (∣e1∣=∣e2∣|e_1| = |e_2|).
P1(1−1∣e∣)=P2(1−1∣e∣)  ⟹  P1=P2P_1 \left(1 - \frac{1}{|e|}\right) = P_2 \left(1 - \frac{1}{|e|}\right) \implies P_1 = P_2.
If elasticity is identical in both markets, the calculated profit-maximizing price is also identical, rendering price discrimination impossible.

Key Concept

Necessity of Differing Demand Elasticities for Price Discrimination
Estimated Time:45s
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Topics

Monopoly: Price Discrimination Conditions, Types, and Effects

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