Question

In which cases would an organization benefit from using direct and indirect price discrimination? Does market structure influence the capacity of the firm to use price discrimination?

Answer 1

There are a few requirements for price discrimination to be succesful. These are given below.

• Imperfect competition

  The firm must be a price maker (i.e., operate in a market with imperfect competition and must be able to affect price by its output). There must be a degree of monopoly power to be able to employ price discrimination. If the company is operating in a market with perfect competition, this pricing strategy would not be possible, as there would not be sufficient ability to influence prices.

• Prevention of resale

  The firm must be able to prevent resale. In other words, consumers who already purchased a good or service at a lower price must not be able to re-sell it to other consumers who would’ve otherwise paid a higher price for the same good or service. Because if resale happens then the higher paying customers will be able to buy from customers who paid lower price.

• Different elasticities of demand

  Consumer groups must demonstrate varying elasticities of demand (i.e., low-income individuals being more elastic to airplane tickets compared to business travelers). If consumers all show the same elasticity of demand, this pricing strategy will not work. If customers have same elasticities of demand, then all their demands will fall and rise in same proportion when price is changed- making price discrimination impossible.

As can be seen above, market structure plays very important role in price discrimination. Price discrimination is possible only in case of imperfect competition. Becausse then a firm can influence prices. If market structure is perfect competition, then price discrimination wont work.