Answer to Question #209933 in Economics of Enterprise for Thabo Itumeleng

Question

Why is price discrimination not possible under perfect market conditions

Answer 1

Solution:

Price discrimination is practically impossible under perfect market conditions.

This is because a perfect market is a market structure where there are many firms, none of which is large enough to influence the market, all producing homogenous products. Furthermore, for price discrimination to occur, the firms in the market must be price setters, which is not the case with firms in perfect markets since they are price takers. The firms in this market can only take the market price as given and they are not in a position to make any price selections whatsoever.

Additionally, both the sellers and the buyers have perfect information regarding the price, quality, and production means, making it even harder to set prices. Should one firm increase its price, demand for the firm’s product will decline massively since consumers will purchase the products from another firm at a lower price. Goods and services in a perfect market are considered perfect substitutes with a perfectly elastic demand curve. Therefore, firms in a perfect market cannot in any way engage in price discrimination.