You are a monopolist producing video game software and know you can segment your market into two 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 producing videos is MC = 5.
(a) If you were to engage in multimarket (sometimes called "third-degree") price discrimination, what prices would you charge to each market segment?
(b) How many units would you sell to each market?
(c) 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,
(a) Determine the aggregate demand for videos. [Hint: Be careful to account for the kink.]
(b) Using this aggregate demand, determine the single monopoly price you would charge.
(c) Calculate the producer's surplus you would receive from this market strategy.
(d) Compare with 1(c), to conclude whether a single price or price discrimination is better.