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Beyond price discrimination: welfare under differential pricing when costs also differ

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  • Chen, Yongmin
  • Schwartz, Marius

Abstract

We extend the analysis of monopoly third-degree price discrimination to the empirically important case where marginal costs also differ between markets. Differential pricing then reallocates output to the lower-cost markets, hence welfare can increase even if total output does not, unlike under pure price discrimination. To induce output reallocation the firm varies its prices but---again, unlike under pure price discrimination---with no upward bias in the average price. Due to this price dispersion, differential pricing motivated solely by cost differences will increase consumer surplus (and total welfare) for a broad class of demand functions. We also provide sufficient conditions for beneficial differential pricing in the hybrid case where both demand elasticities and marginal costs differ.

Suggested Citation

  • Chen, Yongmin & Schwartz, Marius, 2012. "Beyond price discrimination: welfare under differential pricing when costs also differ," MPRA Paper 43393, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:43393
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    References listed on IDEAS

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    Cited by:

    1. Zheng Zhang & Yingtong Wang & Qingchun Meng & Qiang Han, 2022. "Impact of Third-Degree Price Discrimination on Welfare under the Asymmetric Price Game," Mathematics, MDPI, vol. 10(8), pages 1-16, April.

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    More about this item

    Keywords

    price discrimination; differential pricing; price dispersion; add-on pricing;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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