Final answer:
Price discrimination occurs when a firm is a price maker and not a price taker, allowing it to set different prices for different consumers.
Step-by-step explanation:
A perfectly competitive firm is known as a price taker because it must accept the prevailing equilibrium price in the market, which is determined by supply and demand. It cannot choose the price it charges. This is because the firm faces a perfectly elastic demand curve, meaning that buyers are willing to buy any number of units of output from the firm at the market price. Therefore, price discrimination is only possible when a firm is a price maker and has some degree of monopoly power, allowing it to charge different prices to different customers.
Price discrimination is only possible when a firm is a price maker. This scenario contrasts with a perfectly competitive market where firms are price takers due to the high level of competition and standardized nature of the goods or services offered. A price taker faces a perfectly elastic demand curve, meaning they must accept the market price and cannot charge more without losing all sales to competitors. On the other hand, a price maker, such as a monopolist or a firm with market power, faces a downward-sloping demand curve, which allows it to set different prices for different consumers or groups of consumers, effectively practicing price discrimination to maximize profits.