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Can Price Discrimination be Bad for Firms and Good for All Consumers? A Theoretical Analysis of Cross-Market Price Constraints with Entry and Product Differentiation

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  • Azar, Ofer H.

Abstract

The article examines a differentiated-products duopoly model where the firms make entry decisions to two markets and then choose prices. The effects of product differentiation and entry costs are analyzed in two games: with and without price discrimination between the markets. Allowing price discrimination encourages more entry and tends to reduce prices and profits and to increase consumer welfare in both markets. The model suggests that firms might be better off if they agree not to price discriminate between different markets. It also suggests that when the market is not a natural monopoly, regulators should consider the effects of universal service requirements on entry before adopting them, because entry might be discouraged by such requirements, leading to less competitive markets.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4575.

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Date of creation: 2002
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Handle: RePEc:pra:mprapa:4575

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Related research

Keywords: Competitive Strategy; Cross-Market Price Constraints; Price Discrimination; Regulation; Product Differentiation; Entry; Duopoly; Universal Service Requirements;

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References

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  1. B. Douglas Bernheim & Michael D. Whinston, 1990. "Multimarket Contact and Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 1-26, Spring.
  2. Mark Armstrong & John Vickers, 1991. "Welfare Effects of Price Discrimination by a Regulated Monopolist," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 571-581, Winter.
  3. Armstrong, M. & Vickers, J., 1992. "Price Discrimination, Competition and Regulation," Economics Series Working Papers 99140, University of Oxford, Department of Economics.
  4. Rajiv Lal & Carmen Matutes, 1989. "Price Competition in Multimarket Duopolies," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 516-537, Winter.
  5. Anton, James J. & Vander Weide, James H. & Vettas, Nikolaos, 2002. "Entry auctions and strategic behavior under cross-market price constraints," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 20(5), pages 611-629, May.
  6. Kenneth S. Corts, 1998. "Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 306-323, Summer.
  7. Owen R. Phillips & Charles F. Mason, 1996. "Market Regulation and Multimarket Rivalry," RAND Journal of Economics, The RAND Corporation, vol. 27(3), pages 596-617, Autumn.
  8. Bruce A. Blonigen & Thomas J. Prusa, 2001. "Antidumping," NBER Working Papers 8398, National Bureau of Economic Research, Inc.
  9. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
  10. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(3), pages 488-511, June.
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Cited by:
  1. Sílvia Jorge & Cesaltina Pires, 2007. "Entry Decision and Pricing Policies," Working Papers de Economia (Economics Working Papers), Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro 41, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.

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