GENERAL KNOWLEDGE

Detailed explanation-1: -Sellers often price discriminate by offering multiple product qualities at different prices. When consumers have heterogeneous valuations for quality (or quantity), Mussa and Rosen (1978) (and Maskin and Riley, 1984) showed that such price discrimination is always profitable for a monopolist.

Detailed explanation-2: -Price discrimination allows a firm to sell at a much higher output. Therefore it is making use of its previous spare capacity. This allows the firm to be more efficient with its factors of production. The increased output allows the firm to have lower long run average costs, further achieving greater profits.

Detailed explanation-3: -Price discrimination is possible under the following conditions: The seller must have some control over the supply of his product. Such monopoly power is necessary to discriminate the price. The seller should be able to divide the market into at least two sub-markets (or more).