Condition for Price discrimination
Price discrimination occurs when a seller charges different prices for the same goods or services to different customers. In order for price discrimination to be successful, certain conditions must be met:
1. Market power: The seller must have some degree of market power, meaning they have the ability to set prices without fear of significant competition. This allows them to charge different prices to different customers based on their willingness to pay.
2. Price discrimination can only exist when a seller knows the customers’ willingness to pay. Customers must have different demand elasticities, which means they are willing to pay different prices for the same product.
3. Segmented markets: The seller must be able to separate customers into different market segments based on their willingness to pay. This could be based on factors such as location, age, income, preferences, or purchasing behavior.
4. No arbitrage: There should be no possibility for customers to resell the product between different market segments in order to take advantage of price differences.
5. Legal considerations: In some jurisdictions, price discrimination is illegal and considered anti-competitive behavior. Sellers must ensure they are complying with all relevant laws and regulations.