Question

Price discrimination is the practice of charging different customers or groups of customers different prices for the same product. Why does price discrimination occur? Describe the conditions that must be present for price discrimination to occur and justify your answer.

Answer 1

Price discrimination occurs because the monopolists in a market try to capture more of consumer surplus as economic profit than would be possible by charging all the consumers only a single price.

The following conditions must be present for price discrimination to occur:

1)The sellers must be able to prevent the customers who pay the lower price from reselling the product to those customers whom the seller is charging a higher price- This is because in such a situation, the lower paying customers will themselves become competitors to the sellers and will capture a share of the economic profit which the seller was aiming to maximize.

2) The seller must be facing a downward-sloping demand curve.--This is because otherwise at lower quantities, he would be getting very low profits(where a larger chunk of customers are generally expected to be present) which would not be desirable.

3) The seller must identify at least 2 groups of customers with different price elasticities of demand for the product they are selling.-This condition is required because only if the 2 groups of customers will be having different price elasticities will the seller be able to charge the two groups different prices for the same good, else both would have to be charged the same price and price discrimination won't be possible.