The conditions, which make price discrimination possible, are discussed below:
1. Nature of the product / service:
The possibility of price discrimination by a monopolist depends upon the nature of the product/service. For example doctors, on humanitarian grounds, sometimes treat poor patients free of cost and charge higher fees from those patients who are comparatively better off.
Like this special treatment by doctors, or advocates, price discrimination requires extreme customization (i.e., not transferable) in products or services to make it effective. If the product or service is not customer-specific, there might be a possibility that one group of customers/clients will get a product or service at a cheaper rate and resell that in the market at a higher price.
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Thus, if the product or service can be transferred to others, price discrimination will not be possible, i.e. no one will buy the product/service at the higher price and effectively there will be only one price existing in the market – the concession rate.
2. Distance between the markets:
Sometimes, the same product is sold in different geographical locations at different prices. To make this kind of price discrimination viable, the distance between these markets should be such that transport cost for carrying the product from one market to the other must be higher than the difference in price between the two markets located at two geographically different regions, so that, it would not be economically feasible to buy the good in the cheaper market and resell it in the other market.
3. Irrational Buyers:
Price discrimination is also possible where the buyers think that costly products are of superior quality (Veblen Effect), which is not true. As a result, high and low prices for the same product may coexist in the same market, provided the high income group people believe that price is an indicator of quality.
4. Information Asymmetry:
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When the buyers, who purchase the product at a high price, do not know that the same product is also available at a cheap rate, then this asymmetric information also makes price discrimination possible.