Q.State the two conditions that must both be satisfied for a firm to practise profitable price discrimination, and explain why a perfectly competitive firm can never price-discriminate.
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Start your 14-day free trial to unlock the full solution →Condition 1 — Market separation. The seller must be able to genuinely keep the different buyer groups or markets apart, so that a buyer who obtains the good at the LOWER price cannot simply resell it to a buyer in the higher-price market (an act of arbitrage that would eliminate the price gap). Separation can be achieved geographically (different countries or regions), by the specific nature or use of the product (e.g. electricity metered separately for domestic vs. industrial use), or by verifiable buyer characteristics (e.g. student identity cards for concessional fares).
Condition 2 — Different price elasticities of demand. Even if separation is achieved, discrimination is only PROFITABLE if the separated markets have genuinely different price elasticities of demand for the product at the relevant price range. If both markets had exactly the SAME elasticity, the profit-maximising price computed for each would turn out identical anyway, and there would be no benefit — indeed no true "discrimination" — from treating them separately. Because they differ, the firm can extract more total revenue by charging a HIGHER price where demand is LESS elastic (buyers are less price-sensitive, so they still buy nearly as much even at a higher price) and a LOWER price where demand is MORE elastic (a lower price there attracts substantially more sales). …
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