 We will continue our discussion on the theory of game and particular its application on economic analysis. So, last class if you remember we discussed about different types of game and will pick up specifically few types of game which is more applicability in the case of the economic analysis. So, in that context the first discussion will be on the market entry game and here we will analyze that how the when the firm plans to enter into the market generally how he uses the game theory and from the other point of view the existing firms who those who are there in the market how they use game theory to create a barrier to entry or to if the firm is coming into the market how they are going to maximize the profit. So, game of entry of potential firm in an industry which is already a monopoly firm. So, we will take a case where the existing industry set up is there is only one monopoly firm and there is a potential firm who is trying to enter into the market and compete with the monopolist firm to maximize the profit or get the market share. The incumbent has to decide whether to enter the market or stay out. So, incumbent has two choices or the two options at this point of time whether he has to enter the market or he will stay out he will not enter into the market and in the other hand the existing firm typically the monopolist firm has also two options whether to collude if the firm is entering into the market whether to collude with the entrant firm or whether to fight with the entrant firm. So, there are four options that is there with the taking to the incumbent firm of the existing firm. For the incumbent firm the options are whether to enter into the market or stay out and to existing firm whether to whether to fight or collude with the new entrant in the market. So, on that basis now we will try to do a payoff matrix for on the basis of the options available to the existing firm and also to the incumbent firm. So, to draw this payoff matrix we need the payoff for the all these four options. So, here we will take this the case of the entrant and the two options are either to enter or to stay out. This is for the incumbent and what is the options for them collude or fight. Now, the outcome is in term of market share. So, how we can construct the payoff matrix? Suppose the entrant is deciding to enter and the incumbent firm is collude once the new entrant comes the payoff will be 40 and 50 the market share will be 40 for entrant and 50 for the monopolist firm. If the entrant decides to stay out obviously his outcome is 0 he is not going to any market share and the incumbent firm they are going to get the they are going to get 100. So, let us change this is the existing monopolist. Now, if the entrant decides to fight and the existing monopolist entrant decide to enter and the existing monopoly decide to fight in that case if you look at then we take into a case where maybe we can get minus 10 for the payoff and 0 for the monopolist. Why it is minus 10 and why it is 0? Because if the entrant is entering and the existing monopolist is fighting maybe no one is getting a market share and it goes to goes to someone else we can do it may be 19. Then if entrant is entering stay out and obviously there is no choice this fight. So, this comes again to 0 and 100. Now, the basic purpose of doing a payoff matrix is to evaluate the options when the firm is trying to enter into the market basically these evaluating options that if he is entering what will be the market share what will be the outcome and if he is not entering what will be the market share and what will be the outcome. Similarly, the monopolist has two options if the entrant is getting into the market what should be the what should he do whether he should collude whether he should fight. So, one payoff will come if the entrant comes into market and if he is going to fight what should be the market share and if the entrant is entering to the market if he is going to collude what should be the market share. So, collude fight two options for monopolist enter into the market stay out from the market two options for the new firm. So, in this case we get four payoff in term of poor market share and among them now they will decides that whether it is a dominant what should be the dominant strategy for both of them whether they are getting a Nash equilibrium or whether they are getting two Nash equilibrium if there is a absence of the dominant strategy in both these cases. Now, in this case what should be the strategy of the rational monopolist because we assume that the monopolist has two rational and what should be the strategy of the rational monopolist and where the Nash equilibrium generally occurs. So, Nash equilibrium occurs when entrants enter and the increment firm collude with it. So, in this case if you remember your payoff matrix that is the case where both of them they are getting a market share. In all these three options either of them is getting a 0 or them getting a minus, but in this case when if the new firm is entering into the market and existing firm colluding with it then that is whatever the market share is getting that is more preferable for both from the monopolist point of view and the new firm point of view if they are acting rational. So, when it comes to the Nash equilibrium Nash equilibrium typically occurs when the entrant enters and the increment firm collude with it because this is the point actually where both of them they are getting some amount of the market share. So, before going to this this is what this is which this is also a types of game and we will see what is the game tree over here because this is also a sequential game and in this case sequential game how I will see how the game tree looks like. So, this is for the entrant it has two options one is enter another is stay out if it is enter then the existing monopolist has two options one is collude another is fight. So, in that case we get two columns of our monopoly both for the entrant and for the monopoly. So, in this case we get 40 50. So, if entrant enter monopolist collude with it we get a market share we get a payoff matrix 40 50 where the share of entrant is 40 where the share of the monopolist is 50. If entrant enter monopolist fight then we get a share of minus 10 for entrant because cannot part cannot compete with the monopolist and 0 for the monopolist because the market share is not going to come to it is fighting with the existing market or same thing can be analyzed in a different version also because it is getting a market share of 90 whereas the other entrant is getting a market share of 10. Then stay out then what is the option for the monopolist it is again collude it is again fight again we will get a payoff matrix for both the entrant and the monopolist and here we get the payoff as 0 100 0 100 because if the entrant is staying out obviously the market share is 0 whether and the second part is not at all relevant because if it is staying out the question is not coming whether monopoly should collude or monopoly should fight. So, basically and the market share of entrant will be 0 and whether and the all these cases of market share of the monopolist will be 100. So, this is the case of a sequential game where the decision of one firm is always dependent on what is the decision of the other firms and in this case the decision is followed from whatever the market share what is the end outcome here the end outcome is to maximize the market share dependent on what is the outcome with respect to its decision points and also looking at to that what is the rival's action like if the entrant is trying to get into the market now what should be the what should be the decision point of the monopolist. So, the entrant will evaluate option in term of two things that whether the monopolist is going to collude or whether the monopolist is going to fight similarly the monopolist is going to take the options that what would be the market share if he is going to fight and if he is going to collude on that basis he will decide what is the dominant strategy for him. So, typically in case of a market entry situation in case of a situation when the market is trying to enter into the market where there is a monopolist firm generally this game theory is relevant typically a sequential game theory where it gives us the sequence that what should happen if one firm behaves in this direction then the other firms behave in the following action. Then we will talk about the application of game theory in case of a cornered model. So, if you remember we discussed this cornered model in case of a non-collusive oligopoly and cornered models talks about a situation that where there are two firms they are sharing the market and they always assume that the whatever the previous output plan for the other firm that has to be following the revised period also, but practically it leads to a situation where they reach to a suboptimal solution or we can say top part of the market is still untapped by both of the geopolitist firm because they always assume that the output plan whatever followed by the firm in the previous time period that has to that is going to be continued. So, the same thing we will see that how this game theory is applied to a cornered model if both the firms they fight with each other then they earn the geopolit profit because they share the market and they earn a geopolit profit, but if they form a cartel each firm earns a greater profit, but given the structure of the game and the player's rivalry they end up in a suboptimal equilibrium. So, cornered model if you look at always they feel that the other one is going to share take the half of the market. So, his decision point is on the basis of that the other firm is going to take half. So, let me take another half and in that process when the iteration takes place finally, in the revised period revised period and then the nth period if you look at the one third is only taken care of and rest if you look at rest of the rest of the market is not taken care of neither of this firm, but the other option is that if they form a cartel if they cooperate with each other then then ideally they can decide on the basis of their productive capacity or on the basis of their cost function. They can decide that who has to share how much of the market or who has to supply how much share of the market and on that basis they can tap the full market and they can reach to into a optimal equilibrium, but practically the structure of the game is such the cornered model is such that there is a rivalry and they always believe that the output plan is not going to revise by the other player and that is why they go on consider the same output plan and they accordingly they devise their or price and output plan and that is why they lead to a sub optimal equilibrium rather than optimal equilibrium. So, here how we can conclude we can conclude that even if the cooperation is profitable still the firms they are not cooperating with each other rather they are competing with each other and going into a sub optimal equilibrium rather than a optimal equilibrium. Then we will see the Stackelberg model. So, if you remember in case of Stackelberg model it is a leader follower model generally one follow generally one take a lead and the other one is follow. So, we will see that generally the sequential kind sequential types of game is used in case of the Stackelberg model. So, sequential move game is different from the cornered game and typically in case of there is also a difference in case of a cornered model and Stackelberg model even if Stackelberg model is the extension of the cornered model in case of Stackelberg model the significant feature is that one firm acts as the leader and the other firms act as the follower. So, sequential move game is that is how it is different from the cornered game. Here one firm known as the leader chooses his output second firm chooses after observing the first quantity of the output. So, one is as the leader firm second one is the follower firm one firm generally chooses this is the output I am going to produce and the second firm after looking at or after observing that what is the output plan for the first firm generally the second firm decide his quantity. So, this is generally known as a follower leader game and here the leader firm always sets a higher quantity of output and earns more profit than the follower firm and by doing or this they get because they have the first mover advantage. Since they are the leader they are the first one to decide what should be the output generally they get a greater advantage in term of the share in market share in term of the profit because they are the first one to decide what is the share of them and this is generally known as the first mover advantage and always in case of a Stackelberg model the leader or leader firm get a first mover advantage because they are the first one to choose the output and in that way they can maximize the market share and they can maximize the profit also. So, in case of Stackelberg model the equilibrium is decided on the basis of the backward induction in the game theory and how we say this is the backward induction in the game theory because this technique first consider the optimal strategy of the player and its best response which takes the move that are last in the game. So, the equilibrium whatever the method is follow generally known as the backward induction in the game theory. So, in the previous case also in the market entry if you look at the decision of decision point is based on that what is the last decision point of the rivals or what is the last decision point of the opponent. So, this is the part of the backward induction in the game theory where the decision is dependent on the what is the previous decision taken by the opponent and this technique first consider the optimal strategy of the player and its best response with which it takes the move and that is the previous or previous time period that are the last in the game. Here predicting the future action of the last player the second last player proceeds taking the best move. So, in the when it is coming to take above the last player or the predicting about the future action here the second last player proceeds taking the best move and the process continues backward in time determining for each player the best response until the beginning of the game is reached. So, when we identify the best of best what is the best option for each player they go in a backward direction till the time they are reaching the the reaching the beginning of the game because that way they just go on evaluating what is the best response with respect to the previous time period or with respect to the action taken in the previous time period and in that way they decide the optimal strategy. So, in the game theory typically to conclude the game theory we can say in the game theory we discuss about the structure of the game we discuss about what are the assumptions to be taken to use the game theory and then we talked about the types of game and how this game is being used in the case of the economic analysis. So, to sum up we can say that game theory is a tool which is used typically in the economic analysis to understand the group dynamics to understand the group behavior specifically in case of a oligopoly market structure. Then we will start a new topic that is on product pricing because still now we have the understanding that price is decided on the basis of the demand and supply, but there are this is the main basis of demand and supply, but there are many other considerations is taken when we decide the price of the product. So, our next topic will be on product pricing and before deciding the product pricing we will also talk about the kind of price discrimination and then we will go what is the type of product pricing and what is the basis of the product pricing. So, what is the meaning of price if you look at this is the market price this is the value of product, but what price for the seller what price for the buyer. So, if you go in depth it is the price is basically the revenue to the seller because in the end it leads to the revenue to them and for the buyer it is the perceived value of goods and services to them. So, the question here is that what is the right price for a product. So, since price leads different meaning to different kind or different economic agent like it is revenue to the seller and perceived value to the buyers. Now, what is the right price of the product? Right price of the product is one where all economic agent maximize their objectives. Now, who are the economic agents here the buyers price is one where he maximize his utility or may be maximize his consumption for seller when it is maximizing the sales revenue for the supplier it is the maximization of the output and for a firm it is the maximization of the profit because price to him is to maximize the profit to the seller maximizing the sales revenue to the producer maximize the output and to the buyer it is maximize the utility. So, the right price is one which maximize the end objective of all the economic agent in the market or all the economic agent associated with the product. Now, when the firm they need to decide about the price of its product when it is not only when there is selling if they are selling a new product also they need to decide when they are selling the modifier or the improved product or when the seller is entering into the new market or the new market in a typical market segment. So, may be the price has to be decided when the seller is selling a new product or seller is doing some modification or improvement to the initial product or when the seller is entering to the new market or they are entering into the different segment of the existing market. In all these cases there is a value addition to the product whether it is a new product, whether it is a improvement in the existing product or whether the product is entering into the new segment. Since in all these three scenario there is a value addition to the product in all these three cases the producer need to think or the seller needs to think what should be the right price for the product which will give some amount of the profit some amount of the benefit to all the economic agent in the line of their end objectives. So, what is the basic determinant of price we know there are the main determinant of price is demand and supply, but apart from it always linked the price is always linked what is the objective of the firm. If the objective of the firm is to market increase the market share then they are not going to charge a high price they are going to charge a low price whether so that they can tap the market. If the objective of the firm is to maximize the profit then see at that scenario whether the high price or the low price which one will shoot more for the profit maximization. What is the cost of production whether it is a high cost production whether the low cost production if it is high cost production then the price has to be high if it is low cost production the price has to be low because in high cost production if it is low price it is not going to it is not going to maximize the profit by charging that level of price. What should be the what is the market structure if the market structure then the entirely the price is decided by the demand and supply, but if the perfect competitive market structure if it is monopoly then the monopolist is said because he is the price taker firm in the market. If it is monopolistic again or the oligopolist again it depends what is the market power or what is the power of them to set the price on that prices the price will set. What should be the competitor strategy if the price is going to increase or if the price is going to decrease how the rivals or how the opposite opposite or the how the opponent is going to react over here that decides what should be the right kind of price. Then elasticity of demand more elastic is the market there is less flexibility in term of change in the price less elastic at least you can change the price because the quantity is not going to change simultaneously in that proportion because it is a case of the in elastic demand. Similarly, government policy whether it is a regulated market whether it is a unregulated market in case of regulated market any increase in the price or whenever the price is being set by the firm they have to take the concern from the government, but in case of unregulated market at least it is decided by the agents whoever or all it is the firms those who are operating the market what should be the price. So, in that context we will discuss about two kind of pricing one is multi product pricing and second is about the price discrimination discrimination on the basis of the different grounds. We will discuss about two kind of pricing and then we will move into the different types of product pricing. So, we will start with multi product pricing and where multi product pricing is relevant multi product pricing is relevant because most modern firms they produce variety of product rather than single product and if you look at you talk you take the case of your PNG proctor and gamble or you take the case of your Hindustan liver their product is not single their other they produce a multi product and in this case if it is a multi product how the pricing has to be done and why the challenge is there for the pricing because demand for the various products are separable but cost are not quite divisible product wise like for the in the one assembly line if the intermediate good is one product and the final good is one product obviously it is difficult to make a division that what is the product what is the cost associated with the intermediate product and what is the cost associated with the final product and that is why in case of a multi product pricing the demand is separable but the cost is not separable so the cost has to be or where the price has to be decided on the basis of the combined cost for both the product so in this case we get a separated demand function and there is only one cost function so profit maximizing price will be given by a point at which the combined marginal revenue for the products equals to the marginal cost or we can say that the marginal revenue of each of this product equal to the combined marginal cost so we will just take a graphical explanation to understand this identification or the deriving the profit maximizing price and output in case of a multi product pricing so we have if it is two product then we have two demand function and corresponding marginal revenue function then we have P2 MR2 this is the marginal cost then we will get a combined marginal revenue curve that is MR1 and MR2 this is CMR and on that basis we will look at the price and suppose this price is E2 on this basis or this is the point E2 on this basis both the firms they are going to charge the price so this is for P2 that is Q2 this is P2 and similarly for MR1 this is price and this is the quantity so in case of if you look at individually you can do it by making it with MR1 with MC and correspondingly we can get price 1 or MR2 is equal to MC and correspondingly we can get price 2 but since this is the case of a multi product pricing we have this combined marginal function and on that basis we are getting two price that is the we are getting the point E2 on that basis the price is decided that is P2 for the firm 2 and producing the P2 is for the product 2 and producing Q2 level of output and P1 is for product 1 producing Q1 level of output then the second we will say the price discrimination and price discrimination if you look at this is a significant feature of the monopolist firm and why we call it discrimination we call it discrimination because the monopolist charges different prices to the different consumer in different market in different time period exercising their discretion power and that is why this is known as the price discrimination by the monopolist. Now to put it in a definition what is price discrimination it is the act of charging different prices to different consumer in order to capture the consumer surplus so the motivation is to capture the consumer surplus and they do this they capture this consumer surplus by charging different prices to the different consumer. Now what is the basis or what is the prerequisite for this price discrimination in which case monopolist can practice a price discrimination the firm must have the market power and some control over the price that is present in the monopolist market and that is why they practice the monopoly they practice the price discrimination. The firm must be able to distinguish between consumers market on the basis of the elasticity of demand so there should be division between the consumer there should be division between the market on the basis of the elasticity of demand. The firm must be able to prevent resale market must be separable it is not that you can buy in the market in you can buy in one market at the lower price and sell it in the other market so resale to be control otherwise it is not going to be profitable or they cannot practice the price discrimination. So this price discrimination can be possible owing to consumer peculiarity and how this consumer peculiarity come here suppose in any situation if consumer A is unaware of the fact that he is paying a higher price as compared to B or sometimes the price discrimination is so small it is so it is negligible and that is why the monopoly generally do a price discrimination because consumer is just indifferent about the small change in the price a small change in the price between two market or two consumer in the first case when consumer A is the unaware of the fact that consumer pay is paying a lower price so on that basis we can discuss about three type of price discrimination that is first degree, second degree and third degree so when we talk about the consumer peculiarity that is more significant in case of may be third degree and that is why this consumer peculiarity comes up under the part of the third degree price discrimination but here one more consumer peculiarity comes here is when one consumer typically if you remember your Babylon effect in case of consumer behavior when price increases people they think that the product quality has improved and that is why they pay it. In this case also how this price discrimination is possible when the even if the consumer knows that he is paying a higher price but if he feels that he is getting a product which is a higher quality of the other products still the price discrimination is possible. So, price discrimination is possible when the consumer is not aware of the fact that the other one is paying a lower price or consumer feels that if he is paying a higher price there is a quality attached to it and in the third case the the price difference is so minute it is so negligible that generally consumer ignore this. Similarly the discrimination also owing to owing to the nature of the group and sometimes the discrimination also owing to the distance and the front barrier. So, these are the prerequisite for the different type of price discrimination and as we discussed there are three types of price discrimination first degree price discrimination second degree price discrimination and third degree price discrimination. We will start with the discussion with the first degree price discrimination. So, in the first degree price discrimination the monopolies charges each consumer their maximum willingness to pay whatever they are willing to pay it is the monopolies generally charges the price which comes under the maximum and generally in the first degree price discrimination eliminates consumer surplus because each consumer pays the maximum amount whatever they are willing to pay and also it is a charges the maximum possible price for each unit of output. So, first degree price discrimination generally eliminates the dead weight loss because monopolies are able to provide goods more to the consumer. So, we will just take the graphical examples to understand what is the how the generally monopolies by practicing the first degree price discrimination take out all the consumer surplus and also even there is no dead weight loss because dead weight loss comes when the price increases and quantity decreases but here at that price the producer is ready to supply whatever the goods come and that is why there is no dead weight loss the entire consumer surplus goes into the account of the producer surplus. So, if we consider this as equal to m c is equal to a c this is our demand function. So, how we get the consumer surplus this is the market price if for this one for q 1 if the consumer is ready to pay this much the monopolist will charge a price p 1 because this is the maximum willingness of the consumer to pay for the amount q 1. Similarly, if for q 2 if the consumer is ready to pay p 2 the monopolist will charge a price p 2. Similarly, for this amount q 3 if the monopoly if the consumer is ready to p 3 or the willingness to pay p 3 generally this is the market price. So, in this case ideally when the consumer is ready to p 1 but the market price is p 1 p this is the amount of consumer surplus it gets if for q 2 if the consumer is ready to p 2 but generally he get pay only p which is the market price this is the amount of the consumer surplus. And similarly for p 3 but in this case since the monopolist is charging on the basis of willingness to pay the entire consumer surplus is goes to the account monopolist and there is no consumer surplus for the there is no consumer surplus for the typically the consumers those who are buying this product. Next we will see so in one case we know that the consumer there is the entire consumer surplus is taken by the monopolist and secondly we will see how there is no dead weight loss because the entire dead weight loss is also goes with the consumer surplus. In this case we will take this is marginal cost is equal to supply and here we get the demand curve here we get the marginal revenue curve on the basis of the marginal revenue and marginal cost this is the price to be followed and this is the monopoly price. On the basis of the demand and supply we can say this is the competitive price here this is the competitive output this is the monopoly output now what is the here we will say this area is A this area is B this area is D this area is C and this area is E now here if you look at what is the consumer surplus with the monopoly if in a normal market if the monopolist is not practicing the monopolist is not practicing price discrimination what is the consumer surplus with the monopoly that is the area A this is the consumer surplus because the monopolist is not charging the price discrimination but if and what is the producer surplus we are assuming the fact that there is no discrimination at this point of time the monopolist is not doing the price discrimination if monopolist is not doing the price discrimination this is the total consumer surplus and what is the producer surplus producer surplus is the area B plus D this is the total producer surplus consumer surplus is A producer surplus is B plus D what is the dead weight loss because if both consumer surplus is producer surplus is there this is not the competitive price this is the monopolist price there is some amount of the dead weight loss and what is the dead weight loss dead weight loss is C plus A all these consumer surplus producer surplus dead weight loss assuming the fact that this is a monopoly market structure where the price discrimination is not being practiced now if the first degree price discrimination is going to practice if the first degree price discrimination is going to practice now we will see whether there is consumer surplus at all if entire and second is whether there is a dead weight loss or not so looking at this now if you say if there is discrimination now now what is the discrimination discrimination is first degree if the discrimination is first degree we will see what is consumer surplus what is producer surplus and what is dead weight loss so consumer surplus with first degree it has to be 0 because the monopoly will charge a price on the basis of the willingness to pay that is and what is the producer surplus producer surplus dead weight loss is also 0 because the entire amount suppose there is this price is this much if they are going on going on charge the price which is a maximum willingness to pay and this is the PC on that basis QC is come now this is the dead weight loss if the quantity demanded decreases because of increase in the price but since monopoly has the capacity to produce the supply whatever may be the price this C plus C what is dead weight loss this also goes into the account of the producer surplus and that is why we get the producer surplus which is A plus B plus C plus D plus E there is no dead weight loss and there is no consumer surplus so in case of first degree price discrimination the monopoly charge a price on the basis of the maximum willingness to pay for the maximum willingness to pay of the consumer and in that case they capture entire consumer surplus and even there is no dead weight loss because the entire surplus goes into the producer surplus so this is the highest kind of degree of price discrimination but if you look at also in the practice it is difficult to follow because you need to know what is the willingness of the different market then we will talk about the second degree price discrimination and what is the focus of the second degree price discrimination or what is the practice being followed in case of the second degree price discrimination here instead of setting the different prices for each unit pricing is done on the basis of the quantities of output purchased by the individual consumer so here the discrimination is on not on the basis of the price rather it is on the basis of the quantity and typical example of the second degree price discrimination is meter services like electricity and telephone because if you know the first few calls typically in a landline if you look at the first few calls or even for the mobile services also you will find may be 200 minutes is free or 20 calls are free or at least 10 sms are free that comes with the plan and if you go beyond then then you charge a different you get a you have to pay different price similar in case of electricity also 0 to 200 unit there is one tariff rate 200 unit to 500 unit there is one more tariff rate 500 unit to 700 unit there is one more tariff rate so if you look at the charges are different on the charges are different on the basis of the different in the price so if it is the usage is between this unit to this unit this has to be the price so here the discrimination is not on the basis of the price rather the discrimination on the basis of usage or the discrimination on the basis of the quantity so we will take the graphical explanation to the second degree price discrimination so suppose we take this as q 1 we take this as q 2 so here we get a price that is p 1 then we get a price p 2 then we get a price p 3 ok so for here if you look at for q 1 from 0 to q 1 the price being followed is p 1 from q 1 to q 2 the price being followed is p 2 and beyond this q 2 any level of output beyond this beyond q 2 we followed a price that is p 3 so here it is not on the basis of p 1 we are identifying q 1 or p 2 we are identifying q 2 the basis of up to 0 to q 1 amount of output price has to be p 1 q 1 to q 2 price has to be p 2 and q 2 beyond q 2 price has to be p 3 so the price discrimination here is on the basis of the here is on the basis of the quantity rather than the price then we will talk about the third degree price discrimination which is more common and structure and it separates the market on the basis of the price elasticity of demand and here the segmentation is based on geographic separation of markets nature of use and personal characteristic of the consumer so the market is market is divided on the basis of the elasticity of demand like less elastic market more elastic market and on that basis price is generally being followed and secondly the segmentation is on the basis of the sometimes the geographic separation like if you look at the typically books it is Indian edition foreign edition international edition what is the nature of use on the basis of the personal characteristic of also consumer so on that basis if you look at the two kind of market and in the two kind of market the monopolist will charge a different price and how they will charge different prices because in the elastic market any small change in the price will lead to a greater change in the quantity demanded so they will always charge a lower price to get more quantity change in the quantity demanded in the elastic market and there the profit maximization policy is to less price quantity demanded and in case of the inelastic market they will charge a higher price because the consumer they are less responsive to change in the price so even if the monopolist is charging a higher price still there is no much decrease in the quantity demanded so they will always charge a higher price in case of the inelastic demand and lower price in case of elastic demand to make this price discrimination which more effective and make more profitable so we will check this how this third degree price discrimination can be followed so here this is market one so D one marginal revenue one this is market two and this is the total market now here it is the inelastic market we can check this from the shape of the demand curve taking together we get a demand curve and also get a marginal revenue curve so this is demand curve 40 this is marginal revenue of curve 40 that is the total and here this we get the as the on the basis of the marginal cost we get this is the total output of the total sale or the total output of the market now how this has to be get divided between both the market so correspondingly we will take the marginal cost from here taking the marginal revenue and marginal cost the price is decided in the second market that is P two and taking the same cost function will decide the price in case of the first market that is P one so by following this P one in the market one Q one has to be produce and here Q t has to be producer to be sold so Q one has to be sold in market one Q two has to be sold in the market two the price of one is higher than price of two because this the case of the inelastic market and this the case of the third degree price discrimination the monopolist charge different prices on the different market and markets are segmented on the basis of the elasticity of demand so if it is more elastic generally the firm charges a lower price and if it is high elastic then the firm charges a higher price then we will take a numerical to understand this price discrimination how this prices are being discriminated on the basis of the price are discriminated on the basis of the third degree price discrimination when market is differentiated on the basis of the elasticity of demand now what the monopolist they get out of this third degree price discrimination in the first case they are capturing the consumer surplus in case of the first degree price discrimination in the second case it is the middle service so on the basis of the price discrimination trying to charge a higher price and on that basis they are getting the profit in case of third degree then generally they are segregated on the basis of the elasticity of demand and they knows that the when the market is elastic they can charge a lower price because the consumer they are more sensitive in the elastic market and that is why if you are charging a higher price there will be significant reduction in the case of a elastic market and they charge a higher price in the elastic market because if they are charging a higher price still there is no much difference in the quantity demanded or no much decrease in the quantity demanded and by that they can maximize the profit. So, we will continue our discussion on price discrimination the typically the third degree price discrimination and international price discrimination in the next session and along with that also we will talk about pricing how what is the basis of pricing and what are the different type of pricing product pricing in the next session.