Prices are set in the two market so as to equalise marginal revenue, so that P1 is above P2.The higher the elasticity of demand in a particular market, the lower the price charged. The increase in profits relative to charging the same price (P*) in both markets is given equivalently by the areas (CDX)
Perfect price discrimination appropriates to the seller of a good all the customer’s surplus that each customer would get from buying it at a constant price. A two part tariff for telephone service, gas or electricity, whereby a consumer can choose any quantity at a given price, after paying a rent for the right to receive any supply at all, takes some consumer’s surplus in the form of this rental payment. If a profit maximising seller knew the exact form of the consumer’s demand curve, they could fix the rental equal to the area Abp1 in figure 12.12 and obtain exactly the effect of perfect price discrimination.