Why is it important for firms practicing price discrimination to prevent arbitrage of their product?
A) Arbitrage is unrelated to firms' profits since the products are still being sold.
B) Smugglers alter product quality as they pass from market to market, hence harming the reputation and future profits of firms.
C) Arbitrage reduces the profits from price discrimination for firms, and increases profits for smugglers.
D) Arbitrage increases deadweight loss in the market.

Question

Quizplus · Accepted Answer

Price discrimination allows firms to charge different prices to different customers based on their willingness to pay, thereby increasing profits. However, if arbitrage is allowed, customers who purchased the product at a lower price in one market can resell it in another market where the price is higher, eroding the benefits of price discrimination for the firm. This reduces the profits from price discrimination for firms, and increases profits for smugglers who engage in arbitrage.

Why Is It Important for Firms Practicing Price Discrimination to Prevent