What conditions are necessary for successful price discrimination?

Answer 1

1. Different markets must be separable for a seller to be able to practice discriminatory pricing. The market for different classes of consumer must be so separated that buyers form one market are not in position to resell the commodity in the other. Markets are separated by :-

• Geographical distance involving high cost of transportation i.e.. domestic versus foreign markets.
• Exclusive use of the commodity e.g.. doctor service
• Lack of distribution channels e.g.. transfer of electricity from domestic use (lower rate) to industrial use (higher rate)

1. The electricity of demand must be different in different markets. The purpose of price discrimination is to maximize the profit by exploiting the market with different price elasticities. It is the difference in the elasticity which provides an opportunity for price discrimination. If price elasticities of demand in different markets are the same , price discrimination would reduce the profit by reducing the demand in the high price markets.

1. There must be imperfect competition in the market. The firm must have monopoly over the supply of the product to be able to discrimination between different class of consumers, and change different prices.

1. Profit maximizing output is much larger than the quantity demand in a single market or section of consumers.

Price discrimination can be justified if it is practiced by government for the purpose of bringing social equality or to promote specific activities in the society e.g.. railways, controlled by government, charge lower fare from children and student on their academic tower etc. But if price discrimination is practised by private sector to exploit consumers and increase their own profit margin, then government should device legislative measure to control such activities .