Economics Price Discrimination Questions
There are three main conditions required for price discrimination to be successful:
1. Market Power: The firm must have some degree of market power, meaning it has the ability to influence the market price. This allows the firm to charge different prices to different groups of consumers.
2. Segmentation: The firm must be able to identify and separate different groups of consumers with different price elasticities of demand. Price elasticity of demand refers to how responsive consumers are to changes in price. By segmenting the market, the firm can charge higher prices to consumers with relatively inelastic demand and lower prices to consumers with relatively elastic demand.
3. No Arbitrage: There should be limited or no possibility for consumers to resell the product or service at a lower price. If consumers can easily arbitrage and resell the product, price discrimination becomes less effective as consumers will buy at the lower price and resell at a higher price, eroding the price differences set by the firm.