Final answer:
Firms must have market power, differentiable markets, and the ability to prevent resale to effectively price discriminate, standing apart from conditions of perfect competition.
Step-by-step explanation:
To be able to price discriminate, a firm must meet three specific conditions which differentiate it from operating in a state of perfect competition. Perfect competition, as a contrast, requires (1) many firms produce identical products; (2) many buyers and sellers are present; (3) all parties have relevant information; and (4) free market entry and exit.
- Market Power: The firm must have some degree of market power, meaning it has the ability to influence prices. In perfect competition, individual firms are price takers with no control over the market price.
- Differentiable Markets: There must be distinct groups of buyers with different price sensitivities. In perfect competition, all products are identical, and there are no differentiated markets.
- Prevention of Resale: The firm must be able to prevent or limit the resale of its products between customers. Perfect competition assumes no restrictions on the exchange of goods.
The ability to enforce price discrimination relies on the deviation from the conditions of perfect competition and the firm's skill in segmenting the market effectively.