A profitable and effective price discrimination needs the following conditions to be fulfilled :
- Monopoly firm : The firm should be a monopolist.There is perfect knowledge and perfect mobility in perfect competition beside the existence of a large number of sellers.Hence,price discrimination is not possible on perfect competition.
- Market segmentation :The seller must be able to segment the total market by segregating buyers into groups or sub markets according to elasticity.For example,if the buyers can be divided into rich and poor,national and foreigners,they can be changed different prices.
- Market sealing :The resale of the commodity is not possible or is banned.The sellers must able to prevent any significant resale of goods form lower to higher prices bus-markets.Any leakage in the form of resale by buyers between sub-markets will tend to neutralise the effect of differential prices.For example,the services of doctors,lawyers cannot be resold.Likewise,the domestic buyers may not be allowed to sell some products in foreign markets buyers due to difference in income,location,available alternatives,tastes and other factors.In general,high price is changed in the market having inelastic demand and law price is changed in the market having elastic demand.
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