Define the term price discrimination. What conditions must hold for a firm to be able to practice price discrimination? How are consumers affected by price discrimination?

Question

What will be an ideal response?

Answer 1

Price discrimination occurs whenever a firm charges different prices for identical items. For a firm to price discriminate, it must have some monopoly power and must be able to control resale of its product. Moreover, the firm must be able to separate its customers into different groups in the case of third-degree price discrimination. Price discrimination can make consumers either better off or worse off. First-degree price discrimination drives consumers' surplus to zero and makes consumers worse off. On the other hand, second-degree price discrimination increases consumers' surplus and makes consumers better off. Third-degree price discrimination tends to benefit those consumers with more elastic demand, to the detriment of those consumers with less elastic demand.