there are two conditions that must exist if price discrimination is to be successful. what are they? why are they necessary?
Do a little research, then take a shot. what do you think?
1.Differences in price elasticity of demand between markets: There must be a different price elasticity of demand from each group of consumers. The firm is then able to charge a higher price to the group with a more price inelastic demand and a relatively lower price to the group with a more elastic demand. By adopting such a strategy, the firm can increase its total revenue and profits (i.e. achieve a higher level of producer surplus). To profit maximise, the firm will seek to set marginal revenue = to marginal cost in each separate (segmented) market.
2.Barriers to prevent consumers switching from one supplier to another: The firm must be able to prevent “market seepage” or “consumer switching” – defined as a process whereby consumers who have purchased a good or service at a lower price are able to re-sell it to those consumers who would have normally paid the expensive price. This can be done in a number of ways, – and is probably easier to achieve with the provision of a unique service such as a haircut rather than with the exchange of tangible goods. Seepage might be prevented by selling a product to consumers at unique and different points in time – for example with the use of time specific airline tickets that cannot be resold under any circumstances.
1.Differences in price elasticity of demand between markets: There must be a different price elasticity of demand from each group of consumers. The firm is then able to charge a higher price to the group with a more price inelastic demand and a relatively lower price to the group with a more elastic demand. By adopting such a strategy, the firm can increase its total revenue and profits (i.e. achieve a higher level of producer surplus). To profit maximise, the firm will seek to set marginal revenue = to marginal cost in each separate (segmented) market.
2.Barriers to prevent consumers switching from one supplier to another: The firm must be able to prevent “market seepage” or “consumer switching” – defined as a process whereby consumers who have purchased a good or service at a lower price are able to re-sell it to those consumers who would have normally paid the expensive price. This can be done in a number of ways, – and is probably easier to achieve with the provision of a unique service such as a haircut rather than with the exchange of tangible goods. Seepage might be prevented by selling a product to consumers at unique and different points in time – for example with the use of time specific airline tickets that cannot be resold under any circumstances.
The two conditions that must exist for price discrimination to be successful are:
1. Market Segmentation: Price discrimination requires market segmentation - the ability to identify and separate consumers into different groups based on their willingness to pay. These groups should have different levels of price elasticity, meaning some consumers are willing to pay more than others for the same product or service.
2. Price Discrimination Feasibility: Price discrimination is possible when it is difficult or costly for consumers in different segments to engage in arbitrage - i.e., reselling the product or service from a lower-priced segment to a higher-priced segment. The separation of markets ensures that consumers in different segments cannot easily take advantage of price differences.
These conditions are necessary for successful price discrimination because they allow businesses to extract higher profits by charging different prices to different customer groups based on their willingness to pay. By identifying market segments with varying price elasticity, businesses can maximize profit by charging higher prices to more price-sensitive customers while offering lower prices to less price-sensitive customers. Moreover, by ensuring that consumers cannot easily arbitrage between different price segments, businesses can maintain price discrimination and prevent price-sensitive customers from purchasing at lower prices intended for a different segment.