Suppose you are a monopolist producing video game software and know you can segment your market into 2 distinct groups of consumers: kids who will pay almost any price for your software, and older consumers who are very price-sensitive. Your investigation of the market has shown that the demand by kids is Qk = 100 - pk while the demand by adults is Qa = 800 - 40pa . Your marginal cost of forming the videos is MC = 5.
1. What prices would you charge to each market segment if you were to engage in multimarket (sometimes called "third-degree") price discrimination?
2. Determine how many units would you sell to each market?
3. Discuss what would your total producer's surplus be?
Assuming all the same relationships as in the problem above, are you better off by price discriminating or by charging a single price to the entire market? To answer this question,
1. Calculate the aggregate demand for videos.
2. Calculate the single monopoly price you would charge.
3. Determine the producer's surplus you would receive from this market strategy.