Question

a. What conditions make price discrimination possible?

b. A monopoly can sell its good in the US, where the elasticity of demand is -2, and in South Korea,

where the elasticity of demand is -4. Its marginal cost is $10. At what price does the monopoly sell

its good in each country if resales are not possible?

Answer 1

Answer - A. Following conditions are necessary for price discrimination :

• Market is imperfect- This means that sellers stick to their respective markets only and do not go from one market to another. Also every firms must divide it’s target market which shall be distinct from it’s other markets for the same good

• Either should be a monopoly or agreement between sellers: It means that price discrimination is possible only if there is is a condition of monopoly or sellers enter into an agreement to sell at different prices. For example Doctors offer services to rich patients and charge higher as compared to fees of poor patients.

• Markets are seperated geographically: There should be some distance between the markets so that the buyer doesn’t moves from one market to another. It helps in maintaining the price discrimination.

• Each market must have different demands otherwise price discrimination won’t be possible.

• Price discrimination is possible when the seller sells differentiated goods or it not then he can create artificial differences between his goods. This will make the buyer believe that he is obtaining a different product and it helps in maintaing the price discrimination.

B. The image shows the answer.