Chapter 10, Problem 1RQ

To determine

The two requirements of price discrimination.

Explanation of Solution

Price discrimination is practiced by those firms that have the market power with them. The market power is thus the first important requirement for practicing of the price discrimination. The market power is the power obtained by the seller when there are no competitors in the market and no issue of competition raised in the market. This is the key factor without which price discrimination would lead to the loss of consumers to the competent firm in the market.

The second important requirement for the price discrimination practice is the prevention of the resale of the products in the market and the practice of arbitrage in the market. When there is no market competition, the firm earns a market power, and this helps the firm to practice price discrimination. But when there are possibilities of the resale of the products by those who purchase the products or the arbitrage of the goods that is, the practice of selling the product is brought from a distant place where the price is lower for the good. When there are preventive measures, then the firm will ensure that there are no competitors in the market, and it helps to easily practice the price discrimination by the seller in the market.

Economics Concept Introduction

Price discrimination: Price discrimination is the practice of charging different prices from different consumers for the exact same commodity on the basis of the quantity bought or by the place or the group of individuals.