Suppose that a monopolist sells to two groups that have constant elasticity demand curves, with elasticity €1 and €2. The marginal cost of production is constant at c. What price is charged to each group?
The price charged to each group will depend on the monopolist's profit-maximizing strategy. If the monopolist charges the same price to both groups, then the price will be set at the level where the marginal revenue from the two groups is equal to the marginal cost of production (c). If the monopolist charges different prices to the two groups, then the price charged to the group with the higher elasticity (€2) will be lower than the price charged to the group with the lower elasticity (€1). The price charged to the group with the higher elasticity will be set at the level where the marginal revenue from that group is equal to the marginal cost of production (c). The price charged to the group with the lower elasticity will be set at the level where the marginal revenue from that group is equal to the marginal cost of production plus the difference in the marginal revenue from the two groups (c + (MR1 - MR2)).
