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Every seller would price discriminate if there were not two major obstacles standing in the way. First, the seller must be able to distinguish between those buyers who are willing to pay a high price from those who are not. Second, there must be substantial difficulty for a low-price buyer to resell to those willing to buy at a high price.3
Because price discrimination is potentially profitable, businesses have found many ways to do it. Theaters often charge younger customers less than adults. Doctors sometimes charge the rich or insured patient more for services than they charge the poor or uninsured. Grocery stores have a lower price for people who bother to check the newspaper and clip coupons. Some companies, such as firms selling alcoholic beverages, produce similar products but try to promote one as a prestige brand with a much higher price. Electric utilities usually charge lower rates to people who use a lot of electricity (and thus probably have electric stoves and water heaters) than they do to those who use only a little electricity (and who probably have gas stoves and water heaters). Banks offer special interest rates on Certificates of Deposit (CDs) that will not be obtained when one lets a CD roll over. People who are more sensitive to interest rates will take the time and effort to personally renew each maturing CD.
To the extent that businesses find ways to price discriminate, they eliminate the triangle of welfare loss and approach the economically efficient amount of production. Thus, the mere existence of monopoly does not prove there is economic inefficiency.
Next we look at antitrust policy, one government policy towards monopoly.
2 The word "discrimination" has come to have a very negative connotation that it did not have when the term "price discrimination" came into use. At one time it was a compliment to say that someone had "discriminating tastes." To discriminate is to make choices based on some characteristics or attributes of the situation. Our society has decided that some forms of discrimination or making decisions, such as those based on race, are improper, and the word "discrimination" has taken on a much narrower meaning than it had early in the century.
3 A third obstacle standing in the way in the United States has been legal. Several laws restrict the ways in which businesses can price discriminate. Although the stated purpose of these laws is to preserve competition, the sponsors clearly wanted to prevent competition from eliminating small sellers with high costs. A fourth obstacle is public opinion. Many people do not accept a change in demand as a legitimate reason to change price. For them only a change in costs justifies a change in price. As a result of public opinion, firms disguise price discrimination. The children's menu case mentioned at the start is an example of disguised price discrimination.