Price discrimination is the practice of selling the same product at different prices to different customers, when there is no difference in the cost to produce the product. Price discrimination is done to maximize profits. This occurs when market prices are set differently to different buyers, according to the willingness of each buyer to pay (demand curve) rather than setting a uniform price. It can be seen in the image below how if the seller kept the uniform price of Africa’s willingness to pay, the seller would lose a large amount of profit from Europe.
For price discrimination to be successful there needs to be three market conditions that exists. First is the seller must have market power. Market power is the ability to influence the market price of a product, to raise price above marginal cost without fear that other firms will enter the market. This is necessary because price discrimination relies on the principle of adjusting market prices. Market powers can be obtained only when a market is not a perfectly competitive market. Perfectly competitive markets can’t have market powers due to market price being set to the market equilibrium disabling the ability to adjust market prices. Market power can be achieved in several ways including patents, copyrights, high entry barriers, economies of scales, exclusive access to an important resources, technological innovations, reputations, brands, trademarks, government regulations & restricted entries, government ownerships and managements.
The secondly the seller must be able to identify which buyers have different elasticities of demand. The elasticity of demand shows the buyers’ response to change of quantity, due to the change in price. This is needed in order for the seller to know where to place the market price to maximize profit. If the buyers’ demand is more inelastic, the seller will charge more due to the fact those buyers have a lower response in change of quantity when