Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 8: Problem 4

What conditions are necessary before a seller can practice price discrimination?

Short Answer

Expert verified
The conditions necessary for a seller to practice price discrimination are: the seller must have some degree of market power, the market segments must be separable and must not overlap (no chance of resale), and the price elasticity of demand should differ among consumers. The seller charges higher prices where demand is more inelastic.

Step by step solution

01

Definition of Price Discrimination

Price discrimination occurs when a seller charges different prices to different buyers for identical goods or services. This is not due to cost differences.
02

First Condition: Market Power

The seller must possess some degree of market power which permits them to charge different prices. Perfect competitive players cannot discriminate because buyers have related alternatives available.
03

Second Condition: Market Separation

The markets have to be separable, either physically, by time or by nature of use. Segmented markets might be based on geographical locations, age groups, time of use etc.
04

Third Condition: No Resale

The segments must not overlap, i.e., consumers cannot resell the good or service to other consumers. That means, there should be no chance of resale from one market segment to another.
05

Fourth Condition: Differing Price Elasticities

Different consumer groups in the market must react differently to a change in price i.e. price elasticity of demand must differ among consumers. The seller will charge a higher price where the demand is more inelastic.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Define: a. price taker b. market structure c. perfectly competitive market

Why might a firm that voluntarily entered into a cartel agreement decide to cheat on (or breach) the agreement?

Define: a. barrier to entry b. natural monopoly c. price searcher d. antitrust law

In what way or ways are a monopolist, a monopolistic competitor, and a perfect competitor alike?

How might monopolistic competitors' products be slightly different?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free