The Welfare Effects of Regulating the Number of Market Segments
AbstractWe consider a model in which a profit-maximizing organization called the monopolist faces N _ 2 different (micro) market segments while the number k of market segments is chosen the regulator, where k is an integer between 1 and N. Unless k = 1 or k = N, the monopolist's profit maximization is a mixed-integer programming problem, the solution of which is called the optimal profit policy. When demands are linear, we show that it is always worthwhile to regulate the number of market segments since the value of k that maximizes the social welfare under the optimal profit policy is never greater than a critical threshold _k. This result allows us to disentangle the good aspect of price discrimination, the so-called output effect, from the bad one, that we call the pure profit effect. Further results are provided for the specific case of parallel demands. Non-linear demands are also briefly considered.
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Bibliographic InfoPaper provided by IESEG School of Management in its series Working Papers with number 2013-ECO-11.
Length: 28 pages
Date of creation: Dec 2013
Date of revision:
Economics; pricing; market segmentation; direct price discrimination; regulation;
Find related papers by JEL classification:
- C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-07-20 (All new papers)
- NEP-COM-2013-07-20 (Industrial Competition)
- NEP-IND-2013-07-20 (Industrial Organization)
- NEP-REG-2013-07-20 (Regulation)
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