Explain the Conditions Necessary for a Seller of a Good to Be Able to Price Discriminate.
Explain the conditions necessary for a seller of a good to be able to price discriminate.
Price discrimination exists when a seller of sells an identical good or service to different consumers with different prices.
There are three conditions necessary for a seller to be able to practice price discrimination. First, the seller must have some pricing-ability, or in other words, have some degree of market power. Otherwise, when the seller raises the price of the product to certain consumers, those consumers will simply choose to switch to other firms.
The second condition is that the firm must be able to separate the consumers so they cannot resell the product to another consumers. Ways in which this can be achieved include: time, location, age, and gender. For example, a train company can charge a higher price during the peak times and a lower price at other timeframes. If this condition does not occur, the demand in the lower-price market would increase and demand in the higher-price market will fall, meaning that prices will eventually converge and the firm will not be able to charge different prices to different consumers.
The third condition is that the consumers must have different price elasticities of demand (PED) for the product. Some consumers will desire the product more than others, meaning that they have an relatively more inelastic demand. This allows the firm to charge a higher price in the inelastic market and charge a lower price in the elastic market. Be prepared to pay different prices
In conclusion, price discrimination can only occur when the three conditions are met. It can only occur in imperfect market structures like monopoly and oligopoly because firms must have some degree of monopoly power in order to be able to have price-setting ability. Therefore, price discrimination does not exist in perfect competition.
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Price discrimination exists when a seller of sells an identical good or service to different consumers with different prices.
There are three conditions necessary for a seller to be able to practice price discrimination. First, the seller must have some pricing-ability, or in other words, have some degree of market power. Otherwise, when the seller raises the price of the product to certain consumers, those consumers will simply choose to switch to other firms.
The second condition is that the firm must be able to separate the consumers so they cannot resell the product to another consumers. Ways in which this can be achieved include: time, location, age, and gender. For example, a train company can charge a higher price during the peak times and a lower price at other timeframes. If this condition does not occur, the demand in the lower-price market would increase and demand in the higher-price market will fall, meaning that prices will eventually converge and the firm will not be able to charge different prices to different consumers.
The third condition is that the consumers must have different price elasticities of demand (PED) for the product. Some consumers will desire the product more than others, meaning that they have an relatively more inelastic demand. This allows the firm to charge a higher price in the inelastic market and charge a lower price in the elastic market. Be prepared to pay different prices
In conclusion, price discrimination can only occur when the three conditions are met. It can only occur in imperfect market structures like monopoly and oligopoly because firms must have some degree of monopoly power in order to be able to have price-setting ability. Therefore, price discrimination does not exist in perfect competition.
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