DEGREES OF DISCRIMINATON

A monopolist faces a market evenly split high valuation con- sumers, with demand Ph =10-yh and low valuation consumers with demand Pl =8-2yl For convenience, suppose the firm has a marginal cost equal to zero. Ar- bitrage is impossible for this good, and so the firm is free to use two-part tariffs as pricing scheme: the firm can charge a fee as well as a per unit price. a. Suppose the firm can observe group status. Determine the firm’s profit-maximizing third degree two part tariff pricing scheme for these groups. Show this outcome on a graph. b. Now suppose the firm cannot observe group status and so must use second degree price discrimination. Determine the firm’s best second- degree (two part tariff) pricing scheme. Show this outcome on a graph, and explain why your answer is the best outcome for the firm. c. Which of these two outcomes (second degree and third degree) is better from the economy’s view?