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

Author

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  • David Encaoua

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Abraham Hollander

    (UdeM - 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.

Suggested Citation

  • David Encaoua & Abraham Hollander, 2007. "First-Degree Discrimination by a Duopoly: Pricing and Quality Choice," Post-Print halshs-00177604, HAL.
    • Handle: RePEc:hal:journl:halshs-00177604
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00177604
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    References listed on IDEAS

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    5. Colombo, Stefano, 2009. "On the effects of selective below-cost pricing in a vertical differentiation model," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-13.
    6. Stefano Colombo, 2011. "Spatial price discrimination in the unidirectional Hotelling model with elastic demand," Journal of Economics, Springer, vol. 102(2), pages 157-169, March.
    7. Vollstaedt, Ulrike & Imcke, Patrick & Brendel, Franziska & Ehses-Friedrich, Christiane, 2020. "Increasing consumer surplus through a novel product testing mechanism," Ruhr Economic Papers 887, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.

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    More about this item

    Keywords

    competition in pricing regimes; duopoly; quality choice; concurrence en régime de prix; duopole; choix de qualité;
    All these keywords.

    JEL classification:

    • 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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