Why is it important for firms practicing price discrimination to prevent arbitrage of their product?
A) Arbitrage is unrelated to firms' profits since the products are still being sold.
B) Smugglers alter product quality as they pass from market to market, hence harming the reputation and future profits of firms.
C) Arbitrage reduces the profits from price discrimination for firms, and it increases profits for smugglers.
D) Arbitrage increases deadweight loss in the market.

Question

Quizplus · Accepted Answer

Price discrimination allows firms to increase their profits by charging different prices to different groups of consumers based on their willingness to pay. If arbitrage occurs, consumers who pay the lower price in one market may purchase the product and sell it in another market where the price is higher. This reduces the profits from price discrimination for firms and increases profits for arbitrageurs. Therefore, it is important for firms practicing price discrimination to prevent arbitrage of their product in order to maximize their profits.

Why Is It Important for Firms Practicing Price Discrimination to Prevent