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

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Author Info

  • David Encaoua

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)

  • Abraham Hollander

    (UdeM - Université de Montréal - Université de Montréal)

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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Bibliographic Info

Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00177604.

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Date of creation: Jan 2007
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Publication status: Published, The Berkeley Electronic Journal of Theoretical Economics, 2007, 7, 1, Article 14
Handle: RePEc:hal:cesptp:halshs-00177604

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00177604
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Keywords: competition in pricing regimes; duopoly; quality choice;

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References

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  1. Jean-Marc Bonnisseau & Rim Lahmandi-Ayed, 2007. "Vertical differentiation with non-uniform consumers' distribution," International Journal of Economic Theory, The International Society for Economic Theory, The International Society for Economic Theory, vol. 3(3), pages 179-190.
  2. Anindya Ghose & Vidyanand Choudhary & Tridas Mukhopadhyay & Uday Rajan, 2002. "Personalized Pricing and Quality Differentiation on the Internet," Review of Marketing Science Working Papers, Berkeley Electronic Press 2-1-1005, Berkeley Electronic Press.
  3. Hurter, Arthur Jr & Lederer, Phillip J., 1985. "Spatial duopoly with discriminatory pricing," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 15(4), pages 541-553, November.
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  11. 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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  20. Drew Fudenberg & Jean Tirole, 1999. "Customer Poaching and Brand Switching," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1871, Harvard - Institute of Economic Research.
  21. Holmes, Thomas J, 1989. "The Effects of Third-Degree Price Discrimination in Oligopoly," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 244-50, March.
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Citations

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Cited by:
  1. Stefano Colombo, 2011. "Spatial price discrimination in the unidirectional Hotelling model with elastic demand," Journal of Economics, Springer, Springer, vol. 102(2), pages 157-169, March.
  2. Stefano Colombo, 2009. "Pricing Policy and Partial Collusion," DISCE - Quaderni dell'Istituto di Economia e Finanza, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE) ief0090, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  3. Colombo, Stefano, 2009. "On the Effects of Selective Below-Cost Pricing in a Vertical Differentiation Model," Economics Discussion Papers, Kiel Institute for the World Economy 2009-25, Kiel Institute for the World Economy.

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