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Third-degree Price Discrimination with Fairness-concerned Consumers

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  • Tomohisa Okada

Abstract

This paper studies monopolistic third-degree price discrimination, incorporating consumers' fairness concerns: discriminatory pricing antagonizes consumers and may reduce their demand. In contrast to the findings in previous studies, we show that consumers' concerns regarding price inequalities may deter discriminatory pricing by monopolists. Furthermore, a strong aversion to unfair pricing may improve social welfare compared with the situation in which consumers do not perceive price discrimination as unfair. Conversely, if the disutility from price inequality is not sufficiently large, social welfare decreases.

Suggested Citation

  • Tomohisa Okada, 2014. "Third-degree Price Discrimination with Fairness-concerned Consumers," Manchester School, University of Manchester, vol. 82(6), pages 701-715, December.
  • Handle: RePEc:bla:manchs:v:82:y:2014:i:6:p:701-715
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    File URL: http://hdl.handle.net/10.1111/manc.12041
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    References listed on IDEAS

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    1. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory of Fairness, Competition, and Cooperation," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 817-868.
    2. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780199334261.
    3. Jerry A. Hausman & Jeffrey K. MacKie-Mason, 1988. "Price Discrimination and Patent Policy," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 253-265, Summer.
    4. Botond Kőszegi & Paul Heidhues, 2008. "Competition and Price Variation When Consumers Are Loss Averse," American Economic Review, American Economic Association, vol. 98(4), pages 1245-1268, September.
    5. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1039-1061.
    6. Paul M. Sweezy, 1939. "Demand Under Conditions of Oligopoly," Journal of Political Economy, University of Chicago Press, vol. 47, pages 568-568.
    7. Tomohisa Okada & Takanori Adachi, 2013. "Third-Degree Price Discrimination, Consumption Externalities, and Market Opening," Journal of Industry, Competition and Trade, Springer, vol. 13(2), pages 209-219, June.
    8. Englmaier, Florian & Gratz, Linda & Reisinger, Markus, 2012. "Price Discrimination and Fairness Concerns," Discussion Papers in Economics 12735, University of Munich, Department of Economics.
    9. Layson, Stephen K, 1998. "Third-Degree Price Discrimination with Interdependent Demands," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 511-524, December.
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    Cited by:

    1. Hendrik Sonnabend, 2016. "Fairness constraints on profit-seeking: evidence from the German club concert industry," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 40(4), pages 529-545, November.

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