Question

Three necessary conditions must be met before a seller can practice third-degree price discrimination. The conditions are: buyers must be separated into groups or submarkets according to their elasticities of demand, the seller must possess some degree of monopoly power, and_________.

a. the seller must prevent transfer of sales between the groups or submarkets.
b. the seller must have "market dominance".
c. the buyer must have profit maximization as a goal.
d. the buyer must have variable costs that have to be recovered.

Answer 1

A. The Seller Must Prevent Transfer of Sales Between the Groups or Submarkets

Step-by-step explanation:

There are three degrees of price discrimination as follows:

First Degree - This is the perfect degree, where sellers charge consumers the reservation price for goods.

Second Degree - Sellers divide their consumers into groups called blocks and decide to charge certain blocks at the reservation price for goods.

Third Degree - At this point, sellers divide their consumers into sub-markets, each sub-market has its unique demand curve and sellers try to maximise profit in each sub-market.

Looking at the third degree therefore, if sellers are not able to prevent transfer of sales between submarkets then this price discrimination cannot work. Because Submarket A will be able to interact with Submarket B and this will influence the demand curve and even sales.

For instance, if the seller sells at $2 to Submarket A and at $4 to Submarket B; consumers of Submarket B can easily contact Submarket A and buy for $2.5 and cut off the seller completely. Therefore, the seller must prevent the transfer of sales between the submarkets for this degree of discrimination to work.