Page 67 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE

Price discrimination requires that a firm identify different consumers

who are willing to pay different prices. The firm must also be able to prevent
arbitrage, that is, prevent the disadvantaged consumers from purchasing the

product from the consumers who buy it at a favorable price. In theory, there

are few markets where arbitrage is not possible, but in practice arbitrage may
require complex contracts or that consumers overcome inertia, uncertainty,

and instability - or both. Thus competition agencies should not use
theoretical arguments to conclude too quickly that discriminatory practices

cannot occur. Nor should they assume too easily that the conditions for
successful price discrimination are easy for a firm to meet.

Showing that price discrimination is harmful to consumers can be

difficult. In many cases the difference in price may not be discriminatory
because it can be explained by differences in the cost of serving different

consumers. For example, consumers who pay higher insurance premiums or

higher interest rates may be more risky-and thus more costly to supply-than
consumers who pay lower rates. In other cases price differences for what

appears to be the same product can be explained by quality differences. To
rule out such cost-based or demand-based explanations, competition

agencies would have to estimate a firm's costs. But it is well known that such
analysis can be time-consuming and uncertain. Therefore, price

discrimination investigations should not be made a high priority.

In theory, discrimination can be exclusionary when a dominant firm
charges lower prices to buyers more likely to switch to other suppliers. It is

difficult, however, to distinguish this practice from that of a firm selling to
customers willing to pay only a lower price and not the nondiscriminating

price. This practice (referred to in the economic literature as third-degree
price discrimination) can result in more customers being supplied than would

be the case with a single price for everyone. In general, if a discriminatory

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