A monopolist sells a homogeneous good in several distinct submarkets, and the elasticities of demand differ in these submarkets. If the monopolist selects the rate of output to sell in each submarket by equating marginal revenue and marginal cost, then
A) all customers in all markets end up paying the same price.
B) it is not price discriminating, but merely price differentiating.
C) customers in markets with more elastic demand will pay higher prices than customers in markets with less elastic demand.
D) customers in markets with more elastic demand will pay lower prices than customers in markets with less elastic demand.

Question

Quizplus · Accepted Answer

When the monopolist selects the rate of output to sell in each submarket by equating marginal revenue and marginal cost, it sets different prices in each market based on the elasticities of demand. Customers in markets with more elastic demand will choose substitutes more readily and this will result in a lower price being set. Customers in markets with less elastic demand will not have many substitutes, so this market can support a higher price. Thus, customers in markets with more elastic demand will pay lower prices than customers in markets with less elastic demand. This is an example of price discrimination.

A Monopolist Sells a Homogeneous Good in Several Distinct Submarkets