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What three conditions must be present for a company owner to price discriminate successfully?

Question

What three conditions must be present for a company owner to price discriminate successfully?

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Solution

To successfully price discriminate, a company owner must meet three conditions:

  1. Market Power: The company must have some control over the market price. This is usually achieved through product differentiation or being a monopoly.

  2. Identifiable Market Segments: The company must be able to identify different market segments that have different price sensitivities. This could be based on factors like age, location, or income level.

  3. Prevention of Arbitrage: The company must be able to prevent customers from reselling the product or service. If customers could buy the product at a lower price and then sell it to the higher price segment, the price discrimination would not be successful.

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