Price discrimination leads to higher profits for a firm
→ Then why don’t all firms price discriminate?
Three market conditions must be satisfied in order for a firm to successfully price discriminate
- Market Power: if firms don’t have market power, a price increase will result in customers purchasing from a competitor
- Ability to identify different consumer types and their respective price elasticities of demand: this (typically) isn’t easy!
- Prevent arbitrage between markets: customers in the market with the lower price must not be able to resell the product to buyers in the other market