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When does third-degree price discrimination reduce social welfare, and when does it raise it?

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  • Simon GB Cowan
  • Simon Cowan

Abstract

Sufficient conditions are developed for third-degree price discrimination by a monopolist serving all markets to reduce and raise social welfare.� Welfare falls if the demand function in the market whose price is higher with discrimination is at least as convex as that in the other market (at the non-discriminatory price).� Welfare rises if inverse demand in the low-price market is more convex (at the discriminatory price) than inverse demand in the high-price market and the discriminatory prices are close together, so the cost of misallocation is less than the benefit of higher output.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 410.

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Date of creation: 01 Oct 2008
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Handle: RePEc:oxf:wpaper:410

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Keywords: Price Discrimination; Monopoly;

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References

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  1. Iñaki Aguirre, 2008. "Output and misallocation effects in monopolistic third-degree price discrimination," Economics Bulletin, AccessEcon, vol. 4(11), pages 1-11.
  2. 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.
  3. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January.
  4. Layson, Stephen K, 1994. "Market Opening under Third-Degree Price Discrimination," Journal of Industrial Economics, Wiley Blackwell, vol. 42(3), pages 335-40, September.
  5. Aguirre Pérez, Iñaki, 2009. "Joan Robinson Was Almost Right: Output under Third-Degree Price Discrimination," IKERLANAK 2009-38, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.
  6. Hausman, J.A. & Mackie-Mason, J.K., 1988. "Price Discrimination And Patent Policy," Papers 88-13, Michigan - Center for Research on Economic & Social Theory.
  7. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
  8. repec:ebl:ecbull:v:4:y:2008:i:11:p:1-11 is not listed on IDEAS
  9. John Vickers & Simon Cowan, 2007. "Output and Welfare Effects in the Classic Monopoly Price Discrimination Problem," Economics Series Working Papers 355, University of Oxford, Department of Economics.
  10. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, Elsevier.
  11. 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.
  12. 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.
  13. Mark Bagnoli & Ted Bergstrom, 2005. "Log-concave probability and its applications," Economic Theory, Springer, vol. 26(2), pages 445-469, 08.
  14. Nahata, Babu & Ostaszewski, Krzysztof & Sahoo, P K, 1990. "Direction of Price Changes in Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 80(5), pages 1254-58, December.
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Cited by:
  1. Yann Braouezec, 2009. "Incomplete third-degree price discrimination, and market partition problem," Economics Bulletin, AccessEcon, vol. 29(4), pages 2908-2917.

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