Question

Identify and discuss the issues related to price discrimination. Give examples on how firms have corrected these issues. (Hint: Why is price discrimination difficult?)

Answer 1

Price discrimination means charging different prices to different customers for the same products. There are different issues related to the price discrimination. The first issue is the presence of substitutes in the market. If substitutes are present, then customers can switch to these substitutes and price discrimination will not take place. The second issue is the possibility of arbitrage. People buying at a lower price, can sell it to the higher price. It will eliminate the scope of price discrimination. So, it is to be prevented. The third issue is the people having different elasticity of demand that get mixed in one market. It makes people not to buy at higher prices is demand is more elastic for them. It makes firms unable to do price discrimination.

Though, firms try to address the issue of price discrimination. It is only applied by the monopoly firm and it ensures that there are no any substitutes in the market. For example, electricity or fuel has no any substitutes in most of the nations. The second solution is to prevent the arbitrage. It means that selling by one person to another is illegal in nature. It makes people to buy it from the firm. The third solution is to clearly define the market and do such a segregation that customers are offered different prices on the basis of their elasticity of demand.