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Third-Degree Price Discrimination and Consumer Surplus

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  • Simon GB Cowan
  • Simon Cowan

Abstract

This paper presents simple conditions for monopoly third-degree price discrimination to have negative or positive effects on aggregate consumer surplus.� Consumer surplus is often reduced by discrimination, for example when total welfare (consumer surplus and profits) falls.� Surplus increases with discrimination, however, in two cases: first, when the marginal revenues without discrimination are close together and inverse demand in the market where the price will fall with discrimination is more convex; second, when inverse demand functions are highly convex and the discriminatory prices are close together.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 462.

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Date of creation: 01 Nov 2009
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Handle: RePEc:oxf:wpaper:462

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Keywords: Third-degree price discrimination; Monopoly; Consumer surplus;

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References

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  1. Malueg, David A. & Snyder, Christopher M., 2006. "Bounding the relative profitability of price discrimination," International Journal of Industrial Organization, Elsevier, vol. 24(5), pages 995-1011, September.
  2. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
  3. 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.
  4. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
  5. Bulow, Jeremy I. & Klemperer, Paul, 2009. "Price Controls and Consumer Surplus," CEPR Discussion Papers 7412, C.E.P.R. Discussion Papers.
  6. T. Beard & Michael Stern, 2008. "Bounding consumer surplus by monopoly profits," Journal of Regulatory Economics, Springer, vol. 34(1), pages 86-94, August.
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Cited by:
  1. E. Glen Weyl & Michal Fabinger, 2013. "Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition," Journal of Political Economy, University of Chicago Press, vol. 121(3), pages 528 - 583.
  2. Simon GB Cowan, 2013. "Welfare-increasing third-degree price discrimination," Economics Series Working Papers 652, University of Oxford, Department of Economics.
  3. Francisco Galera & José Luis Álvarez & Juan Carlos Molero, 2012. "Technology Choice and Third Degree Price Discrimination in a Monopoly," Faculty Working Papers 15/12, School of Economics and Business Administration, University of Navarra.
  4. Peter Neary & Monika Mrazova, 2013. "Not so demanding: Preference structure, firm behavior, and welfare," Economics Series Working Papers 691, University of Oxford, Department of Economics.
  5. Aguirre Pérez, Iñaki, 2011. "Welfare Effects of Third-Degree Price Discrimination: Ippolito Meets Schmalensee and Varian," IKERLANAK 2011-54, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.
  6. Adachi, Takanori & Ebina, Takeshi, 2014. "Double marginalization and cost pass-through: Weyl–Fabinger and Cowan meet Spengler and Bresnahan–Reiss," Economics Letters, Elsevier, vol. 122(2), pages 170-175.
  7. Yongmin Chen and Marius Schwartz, 2013. "Differential Pricing When Costs Differ: A Welfare Analysis," Working Papers gueconwpa~13-13-01, Georgetown University, Department of Economics.
  8. Dirk Bergemann & Benjamin Brooks & Stephen Morris, 2013. "The Limits of Price Discrimination," Cowles Foundation Discussion Papers 1896R, Cowles Foundation for Research in Economics, Yale University, revised Jul 2013.
  9. Li, Youping, 2013. "Timing of investments and third degree price discrimination in intermediate good markets," Economics Letters, Elsevier, vol. 121(2), pages 316-320.
  10. Aguirre Pérez, Iñaki & Cowan, Simon George, 2013. "Monopoly price discrimination with constant elasticity demand," IKERLANAK Ikerlanak;2013-74, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.
  11. Chen, Yongmin & Schwartz, Marius, 2012. "Beyond price discrimination: welfare under differential pricing when costs also differ," MPRA Paper 43393, University Library of Munich, Germany.
  12. Robert Ritz, 2013. "Price Discrimination and Limits to Arbitrage in Global LNG Markets," Cambridge Working Papers in Economics 1340, Faculty of Economics, University of Cambridge.

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