Question

How does price discrimination move a market that is not perfectly competitive to a more efficient output level?

- Price discrimination gives businesses the incentive to move revenue to its highest possible level.
- Price discrimination gives businesses the incentive to increase output to the level where their marginal cost equals the marginal benefit of their last customer.
- Price discrimination causes businesses to raise its output to the level where the average cost is at its minimum.
- Price discrimination causes businesses to charge the price where marginal cost equals marginal benefit to all customers.

Answer 1

Price discrimination in non-perfectly competitive markets can lead to more efficient output levels by incentivizing businesses to increase production where marginal cost equals the marginal benefit of the last customer, similar to perfectly competitive markets.

Step-by-step explanation:

Price discrimination aims to move a non-perfectly competitive market towards a more efficient output level. It involves businesses charging different prices to different customers for the same product based on their willingness to pay. In the context of a monopolistic or non-perfectly competitive market, perfect price discrimination can lead to an output level that is similar to that of a perfectly competitive market.

In perfect price discrimination, a monopolist can capture more consumer surplus by charging each buyer the maximum they are willing to pay, hence eliminating consumer surplus entirely. This results in the monopolist earning the maximum possible profits. Perfect price discrimination incentivizes businesses to increase output to the level where their marginal cost equals the marginal benefit of the last customer. This ensures that the monopolist provides the socially optimal quantity of goods, albeit at the expense of consumer surplus.

Comparatively, in a perfectly competitive market, firms produce at a level where the price equals marginal cost, leading to allocative efficiency, where the social benefits of additional production match the societal marginal costs. In markets that are monopolistically competitive, the outcome is allocative inefficiency as firms set prices above marginal cost, resulting in less production compared to a perfectly competitive industry.