10.2 Perfect Price Discrimination

A firm with market power that knows exactly how much each customer is willing to pay for each unit of its good and is able to prevent resale can charge each person his or her reservation price: the maximum amount a person is willing to pay for a unit of output. Such an all-knowing firm can perfectly price discriminate. By selling each unit of its output to the customer who values it the most at the maximum price that person is willing to pay, the perfectly price-discriminating monopoly captures all possible consumer surplus.

Perfect price discrimination is rare because firms do not have perfect information about their customers. Nevertheless, it is useful to examine perfect price discrimination because it is ...

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