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Is Perfect Price Discrimination Really Efficient? An Analysis of Free Entry

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Author Info
V. Bhaskar () (University of Essex)
Ted To () (Bureau of Labor Statistics)

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Abstract

We analyze models of product differentiation with perfect price discrimination and free entry. With a fixed number of firms, and in the absence of coordination failures, perfect price discrimination provides incentives for firms to choose product characteristics in a socially optimal way. However, with free entry, the number of firms is always excessive. Our results apply to a large class of models of product differentiation. They also apply to models of common agency or lobbying with free entry and imply that one has excessive entry into the ranks of the principals.

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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 35 (2004)
Issue (Month): 4 (Winter)
Pages: 762-776
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Handle: RePEc:rje:randje:v:35:y:2004:4:p:762-776

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Related research
Keywords: Production; Pricing; and Market Structure; Size Distribution of Firms (Concentration; Product Differentiation; Entry and Exit) Market Structure; Firm Strategy; and Market Performance: Oligopoly and Other Imperfect Markets; monopolistic competition; contestable markets Differentiation; Entry; Firm; Firms; Free Entry; Price Discrimination; Product Differentiation;

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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
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. 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)
  2. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring. [Downloadable!] (restricted)
  3. Kenneth S. Corts, 1998. "Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 306-323, Summer. [Downloadable!] (restricted)
  4. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring. [Downloadable!] (restricted)
  5. Kenneth L. Judd, 1985. "Credible Spatial Preemption," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 153-166, Summer. [Downloadable!] (restricted)
    Other versions:
  6. Varian, Hal R., 1989. "Price discrimination," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 10, pages 597-654 Elsevier. [Downloadable!] (restricted)
  7. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Blackwell Publishing, vol. 43(2), pages 217-35, June. [Downloadable!] (restricted)
  8. Dirk & Juuso Valimaki, 1998. "Dynamic Common Agency," Cowles Foundation Discussion Papers 1206, Cowles Foundation, Yale University. [Downloadable!]
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  9. Stole, Lars A, 1995. "Nonlinear Pricing and Oligopoly," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 4(4), pages 529-62, Winter.
  10. Deneckere, Raymond J & Rothschild, Michael, 1992. "Monopolistic Competition and Preference Diversity," Review of Economic Studies, Blackwell Publishing, vol. 59(2), pages 361-73, April. [Downloadable!] (restricted)
    Other versions:
  11. Spence, Michael, 1976. "Product Differentiation and Welfare," American Economic Review, American Economic Association, vol. 66(2), pages 407-14, May. [Downloadable!] (restricted)
  12. 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)
  13. Simon, Leo K & Stinchcombe, Maxwell B, 1995. "Equilibrium Refinement for Infinite Normal-Form Games," Econometrica, Econometric Society, vol. 63(6), pages 1421-43, November. [Downloadable!] (restricted)
  14. Rochet, Jean-Charles & Stole, Lars A, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Blackwell Publishing, vol. 69(1), pages 277-311, January.
  15. Laussel, Didier & Le Breton, Michel, 2001. "Conflict and Cooperation: The Structure of Equilibrium Payoffs in Common Agency," Journal of Economic Theory, Elsevier, vol. 100(1), pages 93-128, September. [Downloadable!] (restricted)
  16. 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)
  17. Katz, Michael L, 1984. "Price Discrimination and Monopolistic Competition," Econometrica, Econometric Society, vol. 52(6), pages 1453-71, November. [Downloadable!] (restricted)
  18. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
  19. Bernheim, B Douglas & Whinston, Michael D, 1986. "Menu Auctions, Resource Allocation, and Economic Influence," The Quarterly Journal of Economics, MIT Press, vol. 101(1), pages 1-31, February. [Downloadable!] (restricted)
  20. Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-83, September. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mark V. Pauly, 2007. "Drug and vaccine pricing and innovation: what is the story?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(4-5), pages 407-413. [Downloadable!]
  2. Jan Bouckaert & Hans Degryse, 2006. "Opt In Versus Opt Out: A Free-Entry Analysis of Privacy Policies," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Degryse, Hans & Laeven, Luc & Ongena, Steven, 2006. "The impact of organizational structure and lending technology on banking competition," Discussion Paper 67, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  4. Helen Weeds, 2009. "Superstars and the Long Tail: The impact of technology on market structure in media industries," Economics Discussion Papers 669, University of Essex, Department of Economics. [Downloadable!]
  5. Jerome Adda & Samuel Berlinski & V. Bhaskar & Steve Machin, 2009. "Market regulation and firm performance: the case of smoking bans in the UK," IFS Working Papers W09/13, Institute for Fiscal Studies. [Downloadable!]
  6. Mark V. Pauly, 2007. "Drug and vaccine pricing and innovation: what is the story?," Health Economics, John Wiley & Sons, Ltd., vol. 28(4-5), pages 407-413. [Downloadable!]
  7. Leo Kaas, 2004. "Financial market integration and loan competition: when is entry deregulation socially beneficial?," Working Paper Series 403, European Central Bank. [Downloadable!]
  8. Wooders, Myrna & Zissimos, Ben, 2003. "Hotelling Tax Competition," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  9. repec:bep:thetop:v:7:y:2007:i:1:p:1276-1276 is not listed on IDEAS
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  10. Mark Armstrong, 2005. "Recent Developments in the Economics of Price Discrimination," Industrial Organization 0511004, EconWPA. [Downloadable!]
  11. Anindya Ghose & Vidyanand Choudhary & Tridas Mukhopadhyay & Uday Rajan, 2002. "Personalized Pricing and Quality Differentiation on the Internet," Review of Marketing Science Working Papers 2-1-1005, Berkeley Electronic Press. [Downloadable!]
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