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 InfoPaper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00177604.
Date of creation: Jan 2007
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Publication status: Published, The Berkeley Electronic Journal of Theoretical Economics, 2007, 7, 1, Article 14
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competition in pricing regimes; duopoly; quality choice;
Other versions of this item:
- Encaoua David & Hollander Abraham, 2007. "First-Degree Discrimination by a Duopoly: Pricing and Quality Choice," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 1-21, May.
- 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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