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ResearchPro
ResearchPro, Tutor/College Instructor
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Hi, I really struggle with this question... Lets say

Customer Question

Hi,

I really struggle with this question...

Let`s say that arbitrage is not possible between two markets. Why that a seller's profits are greater by setting optimal discriminatory prices in the two markets than by setting the optimal identical price in each of the two markets.

Thank you
Submitted: 5 years ago.
Category: Homework
Expert:  ResearchPro replied 5 years ago.
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Customer: replied 5 years ago.
Hi,

Question: Let`s say that arbitrage is not possible between two markets. Why that a seller's profits are greater by setting optimal discriminatory prices in the two markets than by setting the optimal identical price in each of the two markets.

Would you correct my answer if needed? This is what I came up with:


Firms maximize their profits when marginal revenues equal marginal costs. Pricing strategies must take into consideration marginal costs, which may differ within various market segments. Since this is normally the case, firms must price discriminate in each market segment in order to maximize their profits. If a firm sets the same optimal price in two different market segments without taking into consideration the unique marginal costs associated with each market segment, then it is conceivable that the firm will not maximize their profit in one or possibly both market segments. In other words, firms are best suited when customizing their pricing strategy to fit the unique environment they are operating in.

For example, firms that operate in less developed countries may face lower marginal costs and less demand for selling a product than the same firm operating in the U.S. who may have much higher marginal costs and demand. In this case, it would be prudent for the firm to take into consideration the marginal costs and demand of each market segment and set the optimal price of their product accordingly.

Thanx
Expert:  ResearchPro replied 5 years ago.

I think your answer is very well done. I would only add a bit on consumer needs in each market, such as:

enviroment they are operating in. There are differences in need in divergent markets as well, sometimes based on pure fiscal (economic) issues, other times on cultural or social interests. A firm should use all available marketing tools, including pricing strategies, to determine the maximum over and covert economic benefits for that market.