Stigler argues that
the following two conditions must be satisfied in order to pratise
price discrimination.
Differences in price elasticities of demand
The one with higher
price elasticity will end up paying a lower price. When all people
have the same price elasticity of demand, they pay the same price.
If no individuals have the same elasticity of demand, each of them
pays different prices according to the differences in the elasticity
of demand. (click here
to read more.)
Low enough cost to separate the market
The cost for the
seller to separate the market must not be too high to outweigh the
gain from price discrimination. To separate the market means to identify
different groups of customers based on the differences in elasticity of demand and
collect prices from them separately. This also requires the seller's
ability to prevent reselling.
For example,
if a seller charges me $100 and charges you $60. I can simply
ask you to buy for me instead of paying $100 to the sellers. With
reselling between you and me, price discrimination fails.
Professor Cheung
considers information cost as a sufficient condition for price
discrimination.
For example, if I
have higher information cost than you, I will bargain less and search
less. Thus, it is likely that I will have to pay a higher price. The
most important point is that even if the seller charges me a higher
price, I will not know when information on price is
scarce!