Chapter 11, Problem 1QFR

To determine

Challenges overcome for effective price discrimination

Explanation of Solution

Before a price maker firm executes price discrimination policy effectively it must overcome 2 basic challenges: -

1. Different price elasticities of demand: For executing price discrimination policy effectively the price maker firm must be able to enjoy some or high degree of monopoly power and the same time different consumers must face different price elasticities of demand. E.g. people having low level of income will be more price elastic and sensible to price change while the business class travelers possess more inelastic demand.
2. Separate markets: - The price maker firm must overcome the challenge of identifying and separating the market segments and prevent resale of good. E.g. to stop an adult people from using a kid's movie ticket. Preventing business travelers from purchasing discounted ticket.

Economics Concept Introduction

Introduction:

Price discrimination is the process of imposing different prices from different groups of people for different quantity or quality for the same good or service. The best example of price discrimination exercise is imposing differentiated prices for business class, first class and economy class travels in a same flight. Price discrimination can be exercised only when the firm or seller becomes price maker i.e. one which has partial or complete control over market price and the industry as a whole.