discrimination is possible and the challenges firms face in designing
multiple prices. We then turn to the profit and output effects of price
discrimination, and to the perception that in many cases it is unfair to
consumers.
When Is Price Discrimination Possible?
Price discrimination is profitable for firms, but is not always possible.
Three conditions must be satisfied before a firm can successfully price
discriminate.
Market Power
Any firm that is a price taker cannot discriminate because it has no power
to influence the price at which it sells its product. Our entire discussion
about price discrimination therefore applies only to firms with some
amount of market power. For simplicity, we will consider the case of a
monopoly firm, although any firm with market power will, in general, be
interested in the greater profits that are possible through price
discrimination.
Different Valuations of the Product
Price discrimination is possible if the firm is able to determine the
willingness of its various consumers to pay. Consider two situations. First,
any given consumer might be prepared to pay a different price for
different units of the good. Second, some consumers might be prepared