A monopoly firm sells each unit of its product to an individual buyer at its reservation price—the maximum price people are willing to pay for it. All of the consumer surplus is appropriated by the monopolist, and the marginal revenue curve is exactly the same as the demand curve for its product.
Suppose that the existing marginal costs are constant. Using the strategy of first-degree price discrimination, the monopolist sells its first unit of good Q1 at its reservation price P1, the second (Q2) at the cost of P2, and so on. That is, each buyer pays the maximum of his possibilities. In this case, the marginal revenue curve MR will completely coincide with the demand curve D, and the quantity of sales that maximizes profit corresponds to the point Qn, because it is at point E that the schedule of marginal costs MC intersects the demand curve D(MR) of the monopolist.
It turns out that the marginal importance of lawyer database revenue from selling an additional unit of a product will always be equal to its price, as in perfect competition. As a result, the monopolist's profit will increase by an amount equal to the surplus (the shaded area on the graph).
First degree price discrimination
Let's look at examples of perfect discrimination:
Specialists with limited practice who offer their services to the public at individual prices. For example, a seamstress sets the price of her work in accordance with the income of each individual customer. In this way, she receives the maximum possible profit. Or a lawyer who knows which of his clients has a large fortune and sets a high price for the rich.
Payment can be divided into those accessible to almost anyone (the client pays an “entry fee” and uses the offered set of services or products for this money) and individual (the price is set separately for each product and service).
For example, a person pays a small amount and enters the territory of an entertainment center, inside which one can additionally purchase some products or take advantage of offers from specialists. Thus, everyone receives certain benefits for their money, and some consumers can purchase additional options. The second group of visitors often spends the maximum in order to get full pleasure and recoup the money spent on entry.
This type of price discrimination is rarely implemented in practice. To successfully use the strategy, a company must thoroughly know and understand its audience in order to offer the maximum price for each category of buyers without consequences for itself. Perfect price discrimination is an ideal option, a monopolist's dream, which is difficult to make a reality.
Recommended articles on this topic:
Cross-marketing: 5 examples and 8 mistakes
Sales Triggers That Have Never Failed
How to get contacts from a client: the most effective methods