Suppose the monopoly has a constant marginal cost of 0 and can sell its good to two different groups of customers. One group of “poor” has demand function P = 1.5 – Q; the other – equally large group of “rich” has demand: P = 2 – Q. The seller cannot tell whether a particular consumer is rich or poor, but she knows that there is equal number of both types.

What is the optimal pair of two-part tariffs: the pairs F_r – the entry fee and p_r – the price per unit that monopoly intends for the rich guy and F_p – the entry fee and p_p – the price per unit that monopoly intends for the poor guy?

Does the monopoly serve both groups of customers? Compare the monopoly’s profit from the optimal pair of two part tariffs with the profit that she could make if she ignored the poor consumers altogether. Compare this profit also to the profit that she could make if she offer a single two part tariff to everybody.

Now suppose there is 3 times more poor people that rich. How does your answer to a) change?

Answer rating: 100% (QA)

To find the optimal pair of twopart tariffs lets first consider the case where the number of rich and poor customers is equal 1 Equal Number of Rich a... View the full answer