Answer to Question #129404 in Microeconomics for Loise

Question

Discuss conditions under which a monopolists firm may price discriminate.

Answer 1

Price discrimination refers to a revenue maximisation strategy used by firms with monopoly power in which different prices are charged for the same basic product in different markets. The firms take advantage of different market conditions that characterise different markets. Conditions favouring price discrimination are discussed below.

The following conditions favour price discrimination:

The firm must be a price maker

The firm must be able to set/determine prices of its goods and/or services. Since the firm in question is a monopolist, this condition is already met. Monopolists are single suppliers of a product with no close substitute. Their products therefore enjoy inelastic demand, and hence monopolist firms gain market power to determine prices.

There must be existence of separate markets

Markets must be separate or separable, and the firm must be able to prevent market arbitrage - buying from the low price market and resale in the high price market. Thus, markets must be separate, distinct, and resale between markets must be impossible.

Different markets must have different demand elasticities

More so, the separate and distinct markets must have different demand elasticities. This will make it possible to price discriminate since consumers in demand elastic markets are price sensitive and hence the monopolist firm will price low in such markets however, consumers in demand inelastic markets are less price sensitive and hence the monopolist firm will price high in such markets.

Administration costs must be low

Low administration costs will make it relatively cheap for the monopolist to separate markets, and hence in implementing price discrimination.

Reference:

https://www.economicshelp.org/microessays/pd/price-discrimination/#:~:text=Conditions%20necessary%20for%20price%20discrimination&text=The%20firm%20must%20operate%20in,adults%20using%20a%20child's%20ticket.