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Microeconomics

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Price Discrimination: Less Dead

MICRO-RMMWPC

Firms with pricing power, like monopolies, tend to produce inefficiently low quantities. Whenever there is inefficiency, there is a deadweight loss. So there is a deadweight loss associated with pricing power.

However, under first degree price discrimination, where the firm can charge each consumer their exact marginal value, there is no deadweight loss.

Which of the following is an intuitive explanation for why this is?

A

Because the firm wants to maximize efficiency.

B

Because deadweight loss doesn't count the loss of consumer surplus.

C

Because the firm can lower prices for consumers with low marginal values without lowering prices for everyone else.

D

Because if the firm doesn't produce efficiently, the government will force it to not price discriminate.