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Is Perfect Price Discrimination Really Efficient?: Welfare and Existence in General Equilibrium

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  • Aaron S. Edlin
  • Mario Epelbaum
  • Walter P. Heller

Abstract

The authors examine the welfare properties of surplus maximization by embedding a perfectly discriminating monopoly in an otherwise standard Arrow-Debreu economy. Although they discover an inefficient equilibrium, the authors validate partial equilibrium intuition by showing that equilibria are efficient provided that the monopoly goods are costly and that a natural monopoly can typically use personalized two-part tariffs in these equilibria. However, they find that Pareto optima are sometimes incompatible with surplus maximization, even when transfer payments are used. The authors provide insight into the source of this difficulty and give some instructive examples of economies where a second welfare theorem holds.

Suggested Citation

  • Aaron S. Edlin & Mario Epelbaum & Walter P. Heller, 1998. "Is Perfect Price Discrimination Really Efficient?: Welfare and Existence in General Equilibrium," Econometrica, Econometric Society, vol. 66(4), pages 897-922, July.
  • Handle: RePEc:ecm:emetrp:v:66:y:1998:i:4:p:897-922
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    Cited by:

    1. Rania Zaher Naguib, 2010. "Price Discrimination in Practice: The Market for Drugs in Egypt and the U.S," Working Papers 20, The German University in Cairo, Faculty of Management Technology.
    2. Arthur J. Rolnick & Bruce D. Smith & Warren E. Weber, 1998. "Lessons from a laissez-faire payments system: the Suffolk Banking System, 1825-58," Review, Federal Reserve Bank of St. Louis, issue May, pages 105-116.
    3. Philip Kostov & John Lingard, 2004. "Subsistence Agriculture in Transition Economies: Its Roles and Determinants," Journal of Agricultural Economics, Wiley Blackwell, vol. 55(3), pages 565-579.
    4. David Kelsey & Frank Milne, 2006. "Externalities, monopoly and the objective function of the firm," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 29(3), pages 565-589, November.
    5. Randall S. Kroszner, 1998. "Lessons from a laissez-faire payments system: the Suffolk Banking System, 1825-58 - commentary," Review, Federal Reserve Bank of St. Louis, issue May, pages 117-120.
    6. Antonio Villar Notario, 2000. "On The Efficiency Of Market Equilibrium In Production Economies," Working Papers. Serie AD 2000-17, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

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