Should firms price discriminate Essay Example | Topics and Well Written Essays - 1500 words

Should firms price discriminate - Essay ExampleTherefore, PD can be defined as the situation in which price charged to a customer can be based parti ally on the value of the good to the customer, rather than just on the cost of producing the good itself (Paul, 1987). As a result, allowing a firm to capture all or most of the consumer surplus, increasing overall profit of the firm. Although this rendering is different, it highlights an importance of utility and consumer surplus theorems allowing us to analyze how firms might use their monopoly power. In former(a) words, how PD could be applied, so maximum profit can be gained in different monopoly markets.First of all in order to discuss the usefulness of PD as a profit maximizing tool, we should constitute the conditions that firm must meet in order to price discriminate. According to Fritz Machlup, (Fritz, 1955)there are three principal(prenominal) prerequisites, firstly, a firm has to have the monopoly power in order to set the price. For example, if a firm is a price taker and its operates in perfectly competitive market it cannot price discriminate as demand toot is perfectly elastic, therefore there is no consumer surplus to capture, whereas if a firm is a monopoly it has a descending(prenominal) sloping demand curve therefore, there are some consumers who are willing to pay more(prenominal) than the uniform price. Secondly, for different groups of consumers it is necessary to have different price elasticity. For example, assume that all consumer groups have the alike(p) price elasticity then ceteris paribus monopoly firm does not have an incentive to apply PD as the profit will be the same as a firm would have applied whizz price strategy. The third criteria, is that a firm must be able to prevent an arbitrage, in other words preventing resale of its products. For instance, why do apple restricts on the number of IPhones that can be purchased, it is not because Apple products are exclusive, the r eason is to prevent an arbitrage. Some people might buy IPhones in the US and shift them in the