Question

How often do perfectly competitive firms engage in price discrimination? LO12.6 a. Never. b. Rarely. c. Often. d. Always.

Short answer

a. Never.

Step-by-step solution

Understand Perfect Competition

In a perfectly competitive market, there are many buyers and sellers, all of whom sell identical products. As a result, firms are price takers, not price makers, which means they must accept the equilibrium market price. This is a key characteristic of perfect competition.

Define Price Discrimination

Price discrimination occurs when a seller charges different prices to different consumers for the same product, where the price differences are not due to differences in cost. This requires some control over pricing power or product differentiation.

Evaluate Possibility of Price Discrimination in Perfect Competition

Since firms in perfect competition are price takers and sell identical products, they have no control over the price. They must sell at the market price and cannot discriminate between customers. Therefore, price discrimination is not possible in a perfectly competitive market.

Choose the Correct Answer

Based on the analysis, perfectly competitive firms never engage in price discrimination because they cannot control prices or differentiate their products.

Key concepts

Price Discrimination

In simpler terms, price discrimination happens when a company sells the same product at different prices to different customers. Imagine you buy a movie ticket, and it costs less for a student than for an adult. That's price discrimination in action. For this strategy to work, the company must have some control over prices. They need to charge differently without losing sales. In perfect competition, firms cannot do this because they have to follow the market price. They sell products that are exactly the same as their competitors'. Thus, they can't offer discounts or charge more, making price discrimination impossible for them.

Pricing Power

Pricing power is like having the reins on setting the price of your product. Companies with pricing power can decide how much they want to charge. They could mark up prices or offer discounts depending on the demand and customer type.

• For example, a company with a unique phone model can decide its price, unlike a farmer selling wheat, who can't change the selling price of wheat in a big market.
• Perfectly competitive firms lack this power. They are one among many sellers offering the same product. Thus, they must abide by the price set by market forces.

This lack of pricing power is a fundamental characteristic of perfect competition. Firms must conform to market prices and can’t influence them by any means. They are more like price followers, sticking to the rates determined by overall supply and demand.

Market Equilibrium

Market equilibrium is like a balance point in the marketplace. It occurs where the quantity of the product supplied equals the quantity demanded at a certain price. - Think of it as a fairground ride that players can get on when supply meets demand.
- In perfect competition, market equilibrium is crucial because it's the point where prices are set by the market itself. Price plays no big role of persuasion here for customers or sellers, as the equilibrium price is common for everyone. It’s the best natural state where there is no surplus or shortage in the market. Firms have no choice but to sell their goods at this fixed price if they want to stay in business.

Identical Products

In a perfectly competitive market, all firms sell identical products. It's like having a shelf full of the same brand of canned beans in a grocery store. There's no difference from one seller's beans to another's.

• This uniformity ensures that customers are indifferent as to where they purchase the product from, as every product provides the same value for their money.
• Because of this, firms can't justify changing their prices based on what they offer, as all offerings are the same.

Selling identical products ties the hands of companies when it comes to influencing consumers with different prices or product features. This is a reason why firms in perfect competition are price takers, sticking closely to the equilibrium price settled in the market.