Which of the following is a necessary condition for a firm to engage in price discrimination?

• A. The firm must be able to prevent resale between customers.
• B. The firm must operate in a perfectly competitive market.
• C. All consumers must have identical demand curves.
• D. The firm must have constant marginal cost.

Answer: (A)

Verified step by step guidance

1. Understand the concept of price discrimination: it occurs when a firm charges different prices to different consumers for the same product, based on their willingness to pay.
2. Identify the necessary conditions for price discrimination to be possible. One key condition is that the firm must have some market power, meaning it is not in a perfectly competitive market.
3. Recognize that to successfully price discriminate, the firm must be able to prevent resale or arbitrage between customers who are charged different prices. Otherwise, customers who buy at a lower price could resell to those facing higher prices, undermining the price discrimination strategy.
4. Note that having identical demand curves for all consumers would make price discrimination unnecessary or impossible, as the firm would have no basis to charge different prices.
5. Understand that constant marginal cost is not a necessary condition for price discrimination; firms can price discriminate with varying cost structures.