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

• A. The firm must face a perfectly elastic demand curve.
• B. The firm must operate in a perfectly competitive market.
• C. All consumers must have identical willingness to pay.
• D. The firm must be able to prevent resale between customers.

Answer: (D)

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. Recognize that for price discrimination to be successful, the firm must have some market power, meaning it cannot face a perfectly elastic demand curve (which is typical in perfect competition).
3. Identify that the firm must be able to segment the market, meaning it can distinguish between different groups of consumers with different willingness to pay.
4. A crucial condition is that the firm must prevent resale between customers, because if consumers who buy at a lower price can resell to those who would otherwise pay a higher price, the price discrimination strategy fails.
5. Therefore, the necessary condition is the firm's ability to prevent resale, ensuring that different prices apply to different consumer groups without arbitrage.