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Monopolistic competition, price discrimination and welfare

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  • Li, Youping
  • Shuai, Jie

Abstract

This paper studies third degree price discrimination in a monopolistically competitive market. When the number of firms is fixed, price discrimination raises firm profit and reduces consumer welfare relative to uniform pricing. When entry is endogenized, the equilibrium product variety under price discrimination is always excessive compared with the social optimum, whereas under uniform pricing variety may be too much or too little. Except when entry is far below the welfare optimum under uniform pricing, a ban on price discrimination leads to enhanced consumer and social welfare.

Suggested Citation

  • Li, Youping & Shuai, Jie, 2019. "Monopolistic competition, price discrimination and welfare," Economics Letters, Elsevier, vol. 174(C), pages 114-117.
    • Handle: RePEc:eee:ecolet:v:174:y:2019:i:c:p:114-117
    DOI: 10.1016/j.econlet.2018.09.008
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    References listed on IDEAS

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    Keywords

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    JEL classification:

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

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