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First-Degree Discrimination by a Duopoly: Pricing and Quality Choice

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Author Info
David Encaoua (Université de Paris 1)
Abraham Hollander (Université de Montréal)

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Abstract

The paper examines under what conditions vertically differentiated duopolists engage in first-degree price discrimination. Each firm decides on a pricing regime at a first stage and sets prices at a second stage. The paper shows that when unit cost is an increasing and convex function of quality, the discriminatory regime is the unique subgame-perfect equilibrium of such two-stage game. In contrast to the case of horizontal differentiation, the discriminatory equilibrium is not necessarily Pareto-dominated by a bilateral commitment to uniform pricing. Also, the quality choices of perfectly discriminating duopolists are welfare maximizing. The paper explains why a threat of entry may elicit price discrimination by an incumbent monopolist.

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Publisher Info
Article provided by Berkeley Electronic Press in its journal Topics in Theoretical Economics.

Volume (Year): 7 (2007)
Issue (Month): 1 ()
Pages: 1276-1276
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Handle: RePEc:bep:thetop:v:7:y:2007:i:1:p:1276-1276

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Related research
Keywords: discrimination duopoly quality choice

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Find related papers by JEL classification:
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

References listed on IDEAS
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  1. Stole, Lars A, 1995. "Nonlinear Pricing and Oligopoly," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 4(4), pages 529-62, Winter.
  2. Caminal, Ramon & Matutes, Carmen, 1990. "Endogenous switching costs in a duopoly model," International Journal of Industrial Organization, Elsevier, vol. 8(3), pages 353-373, September. [Downloadable!] (restricted)
  3. Lederer, Phillip J & Hurter, Arthur P, Jr, 1986. "Competition of Firms: Discriminatory Pricing and Location," Econometrica, Econometric Society, vol. 54(3), pages 623-40, May. [Downloadable!] (restricted)
  4. Crampes, C. & Hollander, A., 1991. "Duopoly and Quality Standards," Cahiers de recherche 9128, Universite de Montreal, Departement de sciences economiques.
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  5. Holmes, Thomas J, 1989. "The Effects of Third-Degree Price Discrimination in Oligopoly," American Economic Review, American Economic Association, vol. 79(1), pages 244-50, March. [Downloadable!] (restricted)
  6. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August. [Downloadable!] (restricted)
  7. Hurter, Arthur Jr & Lederer, Phillip J., 1985. "Spatial duopoly with discriminatory pricing," Regional Science and Urban Economics, Elsevier, vol. 15(4), pages 541-553, November. [Downloadable!] (restricted)
  8. V. Bhaskar & Ted To, 2004. "Is Perfect Price Discrimination Really Efficient? An Analysis of Free Entry," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 762-776, Winter.
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  9. Thisse, Jacques-Francois & Vives, Xavier, 1988. "On the Strategic Choice of Spatial Price Policy," American Economic Review, American Economic Association, vol. 78(1), pages 122-37, March. [Downloadable!] (restricted)
  10. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, vol. 20(3), pages 340-359, June. [Downloadable!] (restricted)
  11. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Blackwell Publishing, vol. 49(1), pages 3-13, January. [Downloadable!] (restricted)
  12. Drew Fudenberg & Jean Tirole, 2000. "Customer Poaching and Brand Switching," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 634-657, Winter.
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  13. Severin Borenstein, 1985. "Price Discrimination in Free-Entry Markets," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 380-397, Autumn. [Downloadable!] (restricted)
  14. Jean-Marc Bonnisseau & Rim Lahmandi-Ayed, 2004. "Vertical differentiation with non-uniform consumers¡ distribution," Cahiers de la Maison des Sciences Economiques b04114, Université Panthéon-Sorbonne (Paris 1). [Downloadable!]
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  15. Eric Emch, 2003. "Price Discrimination via Proprietary Aftermarkets," Contributions to Economic Analysis & Policy, Berkeley Electronic Press, vol. 2(1), pages 1063-1063. [Downloadable!] (restricted)
  16. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
  17. Hamilton, Jonathan H. & Thisse, Jacques-Francois, 1992. "Duopoly with spatial and quantity- dependent price discrimination," Regional Science and Urban Economics, Elsevier, vol. 22(2), pages 175-185, June. [Downloadable!] (restricted)
  18. Aguirre, Inaki & Espinosa, Maria Paz & Macho-Stadler, Ines, 1998. "Strategic entry deterrence through spatial price discrimination," Regional Science and Urban Economics, Elsevier, vol. 28(3), pages 297-314, May. [Downloadable!] (restricted)
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