shown by the light shaded row. The firm can increase its profits, however,
if it can charge different prices in the two market segments. By charging
$14 in segment A and only $10 in segment B, the firm’s total output is
unchanged at 56 units, but the allocation of that output across the market
segments is changed, and the firm’s total profit increases to $416, as
shown by the two dark shaded rows.
A firm with market power that can identify distinct market segments will maximize its profits
by charging higher prices in those segments with less elastic demand.Price discrimination among market segments is very common. When the
different segments occur in different regions or countries, distance and
transportation costs keep the markets separate, but sometimes those
impediments are not enough. For example, new cars in the United States
typically sell at a tax-inclusive price between 10 percent and 20 percent
below the price for the same car in Canada. For several years it was
common to hear of Canadians crossing the border to purchase their cars,
paying the necessary Canadian sales taxes when they returned to Canada,
and still saving several thousand dollars on the purchase. When such
behaviour became widespread enough to present a serious problem to
the Canadian dealers who were losing sales to those enterprising
customers, the car companies effectively put an end to the practice by
requiring their Canadian dealers to not honour service warranties for cars
purchased in the United States. In this way, the car companies
successfully maintain their strategy of market segmentation and price
discrimination.