First-Degree Discrimination by a Duopoly: Pricing and Quality Choice
AbstractThe 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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Bibliographic InfoArticle provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.
Volume (Year): 7 (2007)
Issue (Month): 1 (May)
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Other versions of this item:
- David Encaoua & Abraham Hollander, 2007. "First-Degree Discrimination by a Duopoly: Pricing and Quality Choice," UniversitÃ© Paris1 PanthÃ©on-Sorbonne (Post-Print and Working Papers) halshs-00177604, HAL.
- ENCAOUA, David & HOLLANDER, Abraham J., 2005. "First-Degree Discrimination by a Duopoly: Pricing and Quality Choice," Cahiers de recherche 2005-01, Universite de Montreal, Departement de sciences economiques.
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
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