For direct price discrimination to work effectively

Question

Quizplus · Accepted Answer

Direct price discrimination involves charging different prices to different groups of consumers based on their willingness to pay. For this type of price discrimination to work effectively, it is essential that the low-valued group should not be able to arbitrage or buy the product at a lower price and sell it to the high-valued group. If the low-valued group can arbitrage, then they will buy the product at the lower price and sell it to the high-valued group at a higher price, which would result in the high-valued group paying the same price as the low-valued group, defeating the purpose of price discrimination. The other choices, charging the same price to different groups and having the same elasticity of demand, do not apply to direct price discrimination.

For Direct Price Discrimination to Work Effectively