Skip to content

IAI Actuarial Core Principles · Business Economics · Profit maximisation under imperfect competition

Which condition is essential for a firm to be able to sustain third-degree price discrimination profitably?

The key condition is preventing resale between segments. If low-price buyers can resell to high-price buyers, arbitrage removes the price difference. Price discrimination also needs market power and different elasticities across groups, but separation of markets is the essential requirement among these options.

  1. ACustomers in the cheaper market cannot easily resell the product to customers in the dearer marketCorrect
  2. BThe firm must operate in a perfectly competitive market
  3. CPrice elasticity of demand must be identical in every market segment
  4. DMarginal cost must be zero
  5. The firm must face a perfectly elastic demand curve

Explanation

If buyers could resell, arbitrage would erode the price gap and the market would unify at the lower price. The firm also needs market power, so perfect competition fails, and it needs different elasticities across segments, so identical elasticity would remove the gain. Zero marginal cost is not required.

Did you get it right without looking?

One question tells you little. A timed set on Profit maximisation under imperfect competition shows your real accuracy, how long you take and where you lose marks.

Practise Profit maximisation under imperfect competitionFree diagnostic mock

More Profit maximisation under imperfect competition questions