Answer to Question #131119 in Microeconomics for sohrab

Question

What is meant by price discrimination? Explain the condition under which price discrimination is feasible?

Answer 1

Price descrimination refers to the charging of different prices for the same basic good or service to different groups of customers for reasons not associated with the cost of supply. It is a revenue mazimixlzation strategy used by firms with market power.

The following conditions are necessary for price discrimination:

Existance of separate and distinct markets - markets must be separate and different, for example, market for men and for women products.

Possession of market power - the firm must have market or monopoly power over its products, that is, it must be able to determine price. This is possible for firms in imperfect markets, for example, monopolies.

Ability to prevent arbitration - the firm must be able to prevent resale of its products. Switching of consumers from high cost to low cost suppliers must be impossible, for it will promote arbitrage where some customers will buy goods from low cost markets and resale to consumers who would have otherwise bought from high cost markets.

Differences in price elasticity of demand between markets - differences in elasticity between markets enable the firm to charge high prices in markets whose demand elasticity is inelastic whereas charging low prices in markets whose demand is price elastic.