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

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Author Info
Simon Cowan

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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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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: 2008
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Handle: RePEc:oxf:wpaper:410

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Related research
Keywords: Price Discrimination; Monopoly;

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Find related papers by JEL classification:
D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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  1. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany. [Downloadable!]
  2. 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. [Downloadable!] (restricted)
  3. Simon Cowan & John Vickers, 2007. "Output and Welfare Effects in the Classic Monopoly Price Discrimination Problem," Economics Series Working Papers 355, University of Oxford, Department of Economics. [Downloadable!]
  4. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January. [Downloadable!] (restricted)
    Other versions:
  5. 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. [Downloadable!] (restricted)
  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.
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  7. Iñaki Aguirre, 2008. "Output and misallocation effects in monopolistic third-degree price discrimination," Economics Bulletin, Economics Bulletin, vol. 4(11), pages 1-11. [Downloadable!]
  8. Simon Cowan, 2007. "The welfare effects of third-degree price discrimination with non-linear demand functions," Economics Series Working Papers 364, University of Oxford, Department of Economics. [Downloadable!]
  9. David Genesove & Wallace P. Mullin, 1998. "Testing Static Oligopoly Models: Conduct and Cost in the Sugar Industry, 1890-1914," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 355-377, Summer. [Downloadable!] (restricted)
  10. Mark Bagnoli & Ted Bergstrom, 2005. "Log-concave probability and its applications," Economic Theory, Springer, vol. 26(2), pages 445-469, 08. [Downloadable!] (restricted)
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