Conditions for Success

  • 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

    1. Market Power: if firms don’t have market power, a price increase will result in customers purchasing from a competitor
    2. Ability to identify different consumer types and their respective price elasticities of demand: this (typically) isn’t easy!
    3. 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