Question

In order to successfully price discriminate, a firm must be able to prevent arbitrage, which occurs when a:

1) Consumers are able to resell the product at a higher price
2) Consumers are able to buy the product at a lower price
3) Consumers are able to switch between different products
4) Consumers are able to negotiate the price with the firm

Answer 1

Successfully price discriminating requires a firm to prevent arbitrage, which involves reselling a product at higher prices, potentially threatening the firm's pricing strategy. Perfect competition makes price discrimination nearly impossible, while a monopolist can price discriminate within the constraints of market demand.

Step-by-step explanation:

In order to successfully price discriminate, a firm must be able to prevent arbitrage, which occurs when consumers are able to resell the product at a higher price. Arbitrage can undermine the firm's pricing strategy by allowing consumers to take advantage of price differences for the same product in different markets or purchasing scenarios.

For a firm operating under perfect competition, the ability to price discriminate is virtually non-existent as the conditions of many firms producing identical products, many buyers and sellers, and free entry and exit from the market ensure that all participants have the relevant information and likely the same price for the product. In contrast, a monopolist can engage in price discrimination but must be mindful of the demand for its product, as even with high barriers to entry, the price is still ultimately subject to the willingness of consumers to pay.