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The Welfare Effects of Third-Degree PriceDiscrimination in a Differentiated Oligopoly

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  • Takanori Adachi

    ()
    (School of Economics, Nagoya University)

  • Noriaki Matsushima

    ()
    (Institute of Social and Economic Research, Osaka University)

Abstract

This paper studies the welfare effects of third-degree price discrimination under oligopolistic competition with horizontal product differentiation. We derive a necessary and sufficient condition for price discrimination to improve social welfare: the degree of substitution must be sufficiently greater in the "strong" market (where the discriminatory price is higher than the uniform price) than in the "weak" market (where it is lower). It is verified, however, that consumer surplus is never improved; social welfare improves solely due to an increase in the firms' profits.

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Bibliographic Info

Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 800.

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Date of creation: Dec 2011
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Handle: RePEc:kyo:wpaper:800

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Keywords: Third-degree price discrimination; Oligopoly; Social welfare; Horizontal product differentiation; Substitutability; Complementarity;

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  1. Belleflamme,Paul & Peitz,Martin, 2010. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9780521681599, April.
  2. Asplund, Björn Marcus & Eriksson, Rickard & Strand, Niklas, 2002. "Price Discrimination in Oligopoly: Evidence from Swedish Newspapers," CEPR Discussion Papers 3269, C.E.P.R. Discussion Papers.
  3. Hausman, J.A. & Mackie-Mason, J.K., 1988. "Price Discrimination And Patent Policy," Papers 88-13, Michigan - Center for Research on Economic & Social Theory.
  4. Igal Hendel & Aviv Nevo, 2011. "Intertemporal Price Discrimination in Storable Goods Markets," NBER Working Papers 16988, National Bureau of Economic Research, Inc.
  5. Schwartz, Marius, 1990. "Third-Degree Price Discrimination and Output: Generalizing a Welfare Result," American Economic Review, American Economic Association, vol. 80(5), pages 1259-62, December.
  6. Cowan, Simon & Vickers, John & Aguirre Pérez, Iñaki, 2009. "Monopoly Price Discrimination and Demand Curvature," IKERLANAK 2009-39, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.
  7. NEVEN, Damien & PHLIPS, Louis, . "Discriminating oligopolists and common markets," CORE Discussion Papers RP -666, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, December.
  9. Layson, Stephen K, 1998. "Third-Degree Price Discrimination with Interdependent Demands," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 511-24, December.
  10. Ikeda, Takeshi & Toshimitsu, Tsuyoshi, 2010. "Third-degree price discrimination, quality choice, and welfare," Economics Letters, Elsevier, vol. 106(1), pages 54-56, January.
  11. Krishnendu Ghosh Dastidar, 2006. "On Third-Degree Price Discrimination In Oligopoly," Manchester School, University of Manchester, vol. 74(2), pages 231-249, 03.
  12. Simon Cowan, 2007. "The welfare effects of third-degree price discrimination with nonlinear demand functions," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 419-428, 06.
  13. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, Elsevier.
  14. 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.
  15. Layson, Stephen, 1988. "Third-Degree Price Discrimination, Welfare and Profits: A Geometrical Analysis," American Economic Review, American Economic Association, vol. 78(5), pages 1131-32, December.
  16. Adachi, Takanori, 2002. "A Note on 'Third-Degree Price Discrimination with Interdependent Demands.'," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 235, June.
  17. Liu Qihong & Serfes Konstantinos, 2011. "Third-Degree Price Discrimination," Journal of Industrial Organization Education, De Gruyter, vol. 5(1), pages 1-23, March.
  18. Holmes, Thomas J, 1989. "The Effects of Third-Degree Price Discrimination in Oligopoly," American Economic Review, American Economic Association, vol. 79(1), pages 244-50, March.
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