Price Discrimination and Demand Elasticity
A discriminating monopolist aims to maximize profits by charging different prices in different markets. The pricing strategy depends on the price elasticity of demand in each market.
Monopoly Pricing Rule
The fundamental principle for a profit-maximizing monopolist engaging in price discrimination is to charge a higher price in the market where demand is less elastic (i.e., has a lower absolute elasticity value). This is because consumers in less elastic markets are less sensitive to price changes, allowing the monopolist to extract more revenue.
Applying the Rule
In this scenario:
- Market I has a demand elasticity of $E_1 = 2$ (absolute value).
- Market II has a demand elasticity of $E_2 = 1$ (absolute value).
Comparing the elasticities, we find that $E_2 < E_1$ (since $1 < 2$). This means demand in Market II is less elastic than demand in Market I.
Conclusion on Price Behavior
Therefore, the discriminating monopolist will charge a higher price in Market II, the market with the lower price elasticity of demand.
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