Microeconomics

Q2. Under what conditions can a firm sell the same product at different prices?

Price discrimination  exists when sales of identical goods or services are transacted at different prices from the same provider. In a theoretical market with price discrimination, it can only be a feature of monopolistic market, where market power can be exercised. Monopoly firms are "price makers" however this does not mean that they can set any price for a product as people will not be able to afford such high prices. The monopolist however has full power to decide to whom it would want to sell as he moment the monopolist tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price. However, market frictions or high fixed costs (which make marginal-cost pricing unsustainable in the long run) can allow for some degree of differential pricing to different consumers. Price discrimination also occurs when the same price is charged to customers which have different supply costs. The effects of price discrimination on social efficiency are unclear; typically such behavior leads to lower prices for some consumers and higher prices for others. Output can be expanded when price discrimination is very efficient, but output can also decline when discrimination is more effective at extracting surplus from high-valued users than expanding sales to low valued users. Even if output remains constant, price discrimination can reduce efficiency by miss-allocating output among consumers.