Monopoly price discrimination with constant elasticity demand

2012

We extend the analysis of monopoly third-degree price discrimination to the empirically important case where marginal costs also differ between markets. Differential pricing then reallocates output to the lower-cost markets, hence welfare can increase even if total output does not, unlike under pure price discrimination. To induce output reallocation the firm varies its prices but---again, unlike under pure price discrimination---with no upward bias in the average price. Due to this price dispersion, differential pricing motivated solely by cost differences will increase consumer surplus (and total welfare) for a broad class of demand functions. We also provide sufficient conditions for beneficial differential pricing in the hybrid case where both demand elasticities and marginal costs differ.

Journal of Applied Economics & Business Research, 2023

This paper uses both a geometrical and mathematical analysis to explain monopolistic third-degree price discrimination, and it also shows how price discrimination affects society. A frequent policy question in the literature on price discrimination is whether to allow third-degree price discrimination or enforce uniform pricing. A key feature to understanding this issue in the context of imperfectly competitive markets is the impact of price discrimination on output. The article shows that a monopoly facing downward-sloping linear demands and constant marginal costs will obtain higher profits under price discrimination than under a single-price strategy, but price discrimination lowers welfare if the total output does not change. When price discrimination causes total output to increase, then this practice will have a beneficial effect on overall welfare.

… de Fundamentos del Análisis Económico I Universidad …, 2004

The paper investigates the effects on welfare of price discrimination when a multimarket seller faces competition in one of its two markets. With respect to uniform pricing, price discrimination changes competition in such a way, that even with linear demands, price discrimination can be welfareimproving, both under strategic substitutes and strategic complements.

Economica, 2005

This study investigates the effects of monopolistic third-degree price discrimination on market opening in the presence of consumption externalities between separate markets. Assuming symmetric interdependent linear demands and constant marginal cost, we indicate the possibility that with negative externalities a monopolist can do better by closing the relatively small market from the social welfare viewpoint, while it prefers opening that market if price discrimination is feasible. This result contradicts the previous literature on third-degree price discrimination and market opening which asserts that, in the case of non-increasing marginal cost, price discrimination improves social welfare if it opens new markets that are closed under uniform pricing.

The RAND Journal of Economics, 2007

The welfare effects of third-degree price discrimination are analyzed when demand in one market is an additively shifted version of demand in the other market and both markets are served with uniform pricing. Social welfare is lower with discrimination if the slope of demand is log-concave or the convexity of demand is non-decreasing in the price. The demand functions commonly used in models of imperfect competition satisfy at least one of these sufficient conditions.

RePEc: Research Papers in Economics, 2004

This article examines the welfare effects of third-degree price discrimination by a monopolist selling to downstream firms with bargaining power. One of the downstream firms (the "chain store") can integrate backward at lower cost than rivals. Bargaining powers also depend on disagreement profits, bargaining weights, and concession costs. If the chain's integration threat is not credible, price discrimination reduces the input price charged symmetric downstream firms and often reduces the average input price charged asymmetric downstream firms. "When a degree of non-transferability . . . sufficient to make [price] discrimination profitable is present, the relation between the monopolistic seller and each buyer is, strictly, one of bilateral monopoly. The terms of the contract that will emerge between them is, therefore, . . . subject to the play of that 'bargaining' . . . " (A.C. Pigou, 1932, p. 278). Price discrimination policy in the US focuses mainly on intermediate good markets in which buyers have bargaining power. In fact, the primary US law governing price discrimination, the Robinson-Patman Act (1936), arose from concerns that large downstream firms (e.g., chain stores) were harming smaller rivals by negotiating larger discounts with suppliers. 1 In the first formal analysis of buyer-specific price discrimination policy in intermediate good markets, Katz (1987) examined the effects of forbidding third-degree price discrimination when the bargaining power of chain stores comes from their ability to threaten credibly to integrate backward into the supply of the intermediate good. For downstream markets characterized by Cournot oligopoly, he showed that "if there is no integration under either regime (i.e., whether price discrimination * US Federal Trade Commission;

American Economic Journal: Microeconomics

We study second-degree price discrimination by a two-sided monopoly platform. The incentive constraints of the agents on the value creation side may be in conflict with internalizing externalities on the value capture side, which may render pooling optimal. Even without such conflict between the two sides, pooling may be optimal due to type-dependent Spence effects when the preferences of the marginal agents diverge from those of the average agents on the value capture side. We perform a welfare analysis of price discrimination and show that prohibiting price discrimination improves welfare when there is a strong conflict between the two sides. (JEL D42, D62, D82, L12, L82)

1985

Modern theories of monopolistic competition have borrowed extensively from techniques developed in location theory and the theory of spatial pricing: the monopolistically competitive firm is assumed to choose a 'location' and price for its product. A subject that has been of increasing concern in this corpus of theory is that there exists no free-entry price-location equilibrium. In this paper we demonstrate that free-entry price-location equilibrium exists provided only that producers are allowed to price discriminate among customers in a reasonable manner. Equilibrium is modelled as a two-stage game using the Selten concept of subgame perfect Nash equilibrium. It is shown that the equilibrium discriminatory price system is one initially identified by Hoover. In addition, we show that equilibrium is not unique. The precise nature of equilibrium in a particular market will be dependent upon the history of that market. *The authors would like to thank C. Blackorby, T. Bresnahan, X. Vires and two anonymous referees for their helpful comments and suggestions. Remaining errors are the sole responsibility of the authors. Financial support from CIM (Belgium) is gratefully acknowledged. 0167-7187/88/$3.50 © 1988, Elsevier Science Publishers B.V. (North-Holland)

Economics Letters, 2019

Price discrimination raises firm profit and reduces consumer welfare in the short run.  Relative to the social optimum, entry is excessive under price discrimination.  Relative to the social optimum, entry may be insufficient under uniform pricing.  A ban on price discrimination usually improves consumer and social welfare in the long run.