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Price discrimination and investment incentives

Author

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  • Alexandrov, Alexei
  • Deb, Joyee

Abstract

We examine a model of a monopolist selling to two segments of consumers with different preferences for quality. We show that if the firm is unable to price discriminate between the segments, then there is less investment in quality. We find that both consumer segments, and society overall, may suffer if the firm is unable to price discriminate. We extend the model to duopoly competition, and find that our results still hold.

Suggested Citation

  • Alexandrov, Alexei & Deb, Joyee, 2012. "Price discrimination and investment incentives," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 615-623.
  • Handle: RePEc:eee:indorg:v:30:y:2012:i:6:p:615-623
    DOI: 10.1016/j.ijindorg.2012.07.001
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    References listed on IDEAS

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    1. Iñaki Aguirre & Simon Cowan & John Vickers, 2010. "Monopoly Price Discrimination and Demand Curvature," American Economic Review, American Economic Association, vol. 100(4), pages 1601-1615, September.
    2. Jay Pil Choi & Byung-Cheol Kim, 2010. "Net neutrality and investment incentives," RAND Journal of Economics, RAND Corporation, vol. 41(3), pages 446-471.
    3. Roman Inderst & Tommaso Valletti, 2009. "Price discrimination in input markets," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 1-19.
    4. Alexei Alexandrov, 2008. "Fat Products," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(1), pages 67-95, March.
      • Alexei Alexandrov, 2006. "Fat Products," Discussion Papers 1435, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    5. Valletti, Tommaso M., 2006. "Differential pricing, parallel trade, and the incentive to invest," Journal of International Economics, Elsevier, vol. 70(1), pages 314-324, September.
    6. 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.
    7. Roman Inderst & Greg Shaffer, 2009. "Market power, price discrimination, and allocative efficiency in intermediate-goods markets," RAND Journal of Economics, RAND Corporation, vol. 40(4), pages 658-672.
    8. Schmalensee, Richard, 1981. "Output and Welfare Implications of Monopolistic Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 71(1), pages 242-247, March.
    9. Hornbeck, Richard A., 2005. "Price Discrimination and Smuggling of AIDS Drugs," Scholarly Articles 11186012, Harvard University Department of Economics.
    10. Raymond J. Deneckere & R. Preston McAfee, 1996. "Damaged Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 149-174, June.
    11. Yoshihiro Yoshida, 2000. "Third-Degree Price Discrimination in Input Markets: Output and Welfare," American Economic Review, American Economic Association, vol. 90(1), pages 240-246, March.
    12. Layson, Stephen K, 1994. "Market Opening under Third-Degree Price Discrimination," Journal of Industrial Economics, Wiley Blackwell, vol. 42(3), pages 335-340, September.
    13. Hornbeck Richard A., 2005. "Price Discrimination and Smuggling of AIDS Drugs," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-27, September.
    14. DeGraba, Patrick, 1990. "Input Market Price Discrimination and the Choice of Technology," American Economic Review, American Economic Association, vol. 80(5), pages 1246-1253, December.
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    Citations

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    Cited by:

    1. Marc Bourreau & Frago Kourandi & Tommaso Valletti, 2015. "Net Neutrality with Competing Internet Platforms," Journal of Industrial Economics, Wiley Blackwell, vol. 63(1), pages 30-73, March.
    2. repec:bla:ecinqu:v:55:y:2017:i:1:p:339-351 is not listed on IDEAS
    3. Linfeng Li & Miyuan Shan, 2016. "Bidirectional Incentive Model for Bicycle Redistribution of a Bicycle Sharing System during Rush Hour," Sustainability, MDPI, Open Access Journal, vol. 8(12), pages 1-15, December.
    4. Giorgio Matteucci & Pierfrancesco Reverberi, 2013. "Parallel trade, product quality, and welfare," DIAG Technical Reports 2013-14, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
    5. Francisco Galera & Pedro Mendi & Juan Carlos Molero, 2017. "Quality Differences, Third-Degree Price Discrimination, And Welfare," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 339-351, January.
    6. Matteucci, Giorgio & Reverberi, Pierfrancesco, 2014. "Parallel trade, product quality, and welfare," Economics Letters, Elsevier, vol. 122(2), pages 258-262.
    7. repec:kap:jeczfn:v:120:y:2017:i:3:d:10.1007_s00712-016-0508-2 is not listed on IDEAS
    8. Tselekounis, Markos & Xylogianni, Eirini & Varoutas, Dimitris & Martakos, Drakoulis, 2013. "Geographically differentiated NGA deployment," 24th European Regional ITS Conference, Florence 2013 88533, International Telecommunications Society (ITS).
    9. repec:bpj:bejtec:v:18:y:2018:i:1:p:6:n:11 is not listed on IDEAS
    10. Braouezec, Yann, 2016. "On the welfare effects of regulating the number of discriminatory prices," Research in Economics, Elsevier, vol. 70(4), pages 588-607.

    More about this item

    Keywords

    price discrimination; investment; parallel trade; pharmaceuticals; net neutrality;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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