Question

1) In which cases would an organization benefit from using direct and indirect price discrimination? 2) Does market structure influence the capacity of the firm to use price discrimination?

Answer 1

1.

Direct price discrimination takes place when organization identifies its different buyer groups and indirect price discrimination takes place when the organization affects customers' purchase behavior and it is done using discounts, coupons and  bundling. The organization will benefit from direct and indirect price discrimination in cases when there is a lack of substitutes of  its products as well as there is no arbitrage opportunity for its products. It makes consumers to come to the organization and buy products irrespective of the price discrimination it does.

2.

Market structure affects the capacity of the firm to use price discrimination and it is true, because market structure decides the number of firms present in the market and it transforms into the market power of the firm. With increase in market power, the price discrimination increases. For example, monopoly market structure has one firm in the market that increases the firm's market power and price discrimination of first, second or third degree are applied. But, in the case of perfectly competitive market structure, where the number of seller firms are many, then firms are price takers and there is no market power with them. In this market, price discrimination does not exist.

Hence, it is the market structure, that dictates the ability to perform price discrimination.