1.3 Explain how consumer surplus, economic profit and output change when a monopoly perfectly price discriminates. Because perfect price discrimination achieves an output at which price equals marginal cost, the same quantity as perfect competition, it creates no deadweight loss and is efficient.

The more perfectly a monopoly can price discriminate, the closer its output is to the competitive output and the more efficient is the outcome.

But the outcomes of perfect competition and perfect price discrimination differ. First, the distribution of the total surplus is not the same. In perfect competition, total surplus is shared by consumers and producers whereas with perfect price discrimination, the monopoly takes it all.

Second, because the monopoly takes the entire total surplus, rent seeking becomes more profitable, and more resources get used in pursuing rents. With free entry into rent seeking, in long-run equilibrium rent seekers use up the entire producer surplus.

Real-world firms don’t achieve perfect price discrimination, but they are just as creative as Inter-City Airlines, as you can see in the cartoon! Disney Corporation is creative too in extracting consumer surplus, as Economics in Action shows.