ABSTRACT
When firms face finite customer responses from price changes, they have market power. This means that they can set prices more freely compared with firms operating in markets recognized by perfect competition. This chapter is devoted to explaining the theory and practice of these concepts and why firms (always) and customers (sometimes) should both be eager to have more of it. Variation in the customers’ reservation prices is an important prerequisite for price differentiation to be possible. This simply means that some customers are willing to pay more for a product or service than others. Firms can segment the market based on specific criteria or attributes among its customers. Examples include gender, age, members/non-members, or other groups of customers that can be easily identified based on certain characteristics.
