First-Degree Discrimination

A car dealer who haggles face to face can charge each customer a different price. The first buyer, who arrived ready to pay top dollar, leaves having paid almost exactly that. The next, who would have walked at a lower number, pays just under their limit. The last buyer pays barely more than cost. Every sale extracts the buyer’s maximum.

That is first-degree or perfect price discrimination. Every unit sells at its own price, equal to that buyer’s reservation value. The monopolist captures the entire consumer surplus. None is left for buyers.

Under a single uniform price, selling one more unit forces a price cut on every previous unit. That cut is the price effect — the reason $MR$ sits below $P$ for an ordinary monopolist. Under perfect discrimination there is no price cut on earlier sales. Each unit is priced on its own. Marginal revenue collapses to the price on the new unit:

Two things follow. The firm now stops where $P=MC$ — the same condition a competitive market would hit. The quantity is the efficient quantity $Q^{\ast }$ and deadweight loss is zero. But the firm collects every dollar of surplus between the demand curve and $MC$. Consumer surplus is zero. Producer surplus is the whole triangle.