Paul Springett B/Alamy Stock Photo
Prevent Arbitrage
Whenever the same product is being sold at different prices, there is an
incentive for buyers to purchase the product at the lower price and re-sell
it at the higher price, thereby making a profit on the transaction. This is
called arbitrage. A price-discriminating firm must be able to prevent
people from conducting such transactions. Otherwise the firm will end up
selling only at the low price and all the profits that the strategy of price
discrimination was designed to produce will accrue to those who do the
arbitrage. As we will soon see, the successful prevention of this arbitrage
depends crucially on the nature of the product being sold.