Price Discrimination

Price discrimination refers to charging different prices for the same product or service from different customers. It is a common business practice and is often used to increase profits. However, it can only be implemented under certain conditions.

Conditions for Price Discrimination

1. Homogeneous Goods

Price discrimination is possible only when goods are homogeneous, i.e., they are identical in terms of quality, features, and performance. If the goods are not homogeneous, customers will be willing to pay different prices for different qualities.

2. Market Power

A seller must have a certain degree of market power to implement price discrimination. The seller must have some control over the price and supply of the product or service to discriminate between customers.

3. Segmented Markets

Price discrimination is possible only when there are segmented markets. The seller must be able to identify different groups of customers with different price elasticities of demand. Customers in one segment should not be able to resell the product to customers in another segment.

4. No Arbitrage

Arbitrage is the practice of buying a product in one market and selling it in another market to make a profit. Price discrimination is possible only when there is no arbitrage. Customers in different segments should not be able to buy the product at a low price and sell it to customers in another segment at a higher price.

Conclusion:

In conclusion, Price discrimination is possible only when goods are homogeneous, and the seller has a certain degree of market power. The seller must be able to identify different groups of customers with different price elasticities of demand, and there should be no arbitrage.