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CA Foundation · Business Economics · Price Determination in Different Markets

Which of the following is a necessary condition for a monopolist to successfully practise price discrimination?

Preventing resale between markets is necessary. Without separation, buyers could buy at the low price and resell at the high price, wiping out the price difference. Discrimination also needs differing elasticities of demand and the firm must have monopoly power.

  1. ADemand elasticities must be the same in all markets
  2. BResale of the product from the low-price market to the high-price market must be preventedCorrect
  3. CThe product must be sold at the same price in all markets
  4. DThe firm must face a perfectly elastic demand curve

Explanation

If buyers in the cheaper market could resell to those in the dearer market, arbitrage would eliminate the price difference. So markets must be separable and resale prevented. Discrimination is profitable only when elasticities differ, and it means charging different prices, so the other options are wrong.

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