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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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43393.

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Date of creation: 23 Dec 2012
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Handle: RePEc:pra:mprapa:43393

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Keywords: price discrimination; differential pricing; price dispersion; add-on pricing;

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  1. Raymond J. Deneckere & R. Preston McAfee, 1996. "Damaged Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 149-174, 06.
  2. 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.
  3. Simon Cowan, 2012. "Third-Degree Price Discrimination and Consumer Surplus," Journal of Industrial Economics, Wiley Blackwell, vol. 60(2), pages 333-345, 06.
  4. 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.
  5. Glenn Ellison, 2005. "A Model of Add-on Pricing," The Quarterly Journal of Economics, MIT Press, vol. 120(2), pages 585-637, May.
  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. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-75, September.
  8. 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.
  9. 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.
  10. 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.
  11. Malueg, David A, 1993. "Bounding the Welfare Effects of Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 83(4), pages 1011-21, September.
  12. Schmalensee, Richard., 1980. "Output and welfare implications of monopolistic third-degree price discrimination," Working papers 1095-80., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  13. Layson, Stephen K, 1998. "Third-Degree Price Discrimination with Interdependent Demands," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 511-24, December.
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