Price discrimination can be defined as the differences in the ratio of price to marginal cost across buyers or unit of a good. One form of price discrimination is the practice of a firm charging multiple prices for the same good where the difference in price is not attributable to a corresponding difference in cost. Another form of price discrimination is the practice of a firm charging the same price for all units of the same good when there are cost variations in supply.
Not all firms can price discriminate. For a firm to practice price discrimination three conditions must apply. First the firm must not be a price taker and it must have some market power. Even the slightest market power shows that the firm faces a negatively sloped demand curve for its product. Price discrimination can occur under oligopoly and monopolistic competition as well as pure monopoly. Siny PLC should consider this factor before going into price discrimination because simply competitive firms can not price discriminate.
This is because it will not be of any benefit of the firm activities. This is the firm's attempt to capture some of this surplus for itself.
Price discrimination also requires that the firm can control the sale of its product. Resale may be prevented by the nature of the commodity or via licensing agreements, copyrights or other legal agreements. If a seller charges a higher per unit price to large buyers than to small buyers, the firm must prevent multiple purchases at a low price by a single buyer for example by imposing quantity limitations.
The biggest obstacle to price discrimination is the firm's inability to prevent resale. In some markets, however resale is inherently difficult or even impossible; firms can take actions that prevent resale or government actions or laws...