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When Is Price Discrimination Profitable?

Author

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  • Eric T. Anderson

    () (Kellogg School of Management, Northwestern University, Evanston, Illinois 60208)

  • James D. Dana, Jr.

    () (Department of Economics and College of Business Administration, Northeastern University, Boston, Massachusetts 02115)

Abstract

We consider a general model of monopoly price discrimination and characterize the conditions under which price discrimination is and is not profitable. We show that an important condition for profitable price discrimination is that the percentage change in surplus (i.e., consumers' total willingness to pay, less the firm's costs) associated with a product upgrade is increasing in consumers' willingness to pay. We refer to this as an increasing percentage differences condition and relate it to many known results in the marketing, economics, and operations management literatures.

Suggested Citation

  • Eric T. Anderson & James D. Dana, Jr., 2009. "When Is Price Discrimination Profitable?," Management Science, INFORMS, vol. 55(6), pages 980-989, June.
  • Handle: RePEc:inm:ormnsc:v:55:y:2009:i:6:p:980-989
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    File URL: http://dx.doi.org/10.1287/mnsc.1080.0979
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Dana Jr., James D. & Yahalom, Tomer, 2008. "Price discrimination with a resource constraint," Economics Letters, Elsevier, vol. 100(3), pages 330-332, September.
    2. Joan Calzada & Tommaso M. Valletti, 2012. "Intertemporal Movie Distribution: Versioning When Customers Can Buy Both Versions," Marketing Science, INFORMS, vol. 31(4), pages 649-667, July.
    3. Murfin, Justin & Petersen, Mitchell, 2016. "Loans on sale: Credit market seasonality, borrower need, and lender rents," Journal of Financial Economics, Elsevier, vol. 121(2), pages 300-326.
    4. Mark Armstrong, 2016. "Nonlinear Pricing," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 583-614, October.
    5. Renato Gomes & Alessandro Pavan, 2011. "Price Discrimination in Many-to-Many Matching Markets," Discussion Papers 1540, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Alessandro Pavan & Renato Gomes, 2011. "Many-to-Many Matching Design and Price Discrimination," 2011 Meeting Papers 1212, Society for Economic Dynamics.
    7. Sun, Ching-jen, 2007. "Dynamic Price Discrimination and Quality Provision Based on Purchase History," MPRA Paper 9855, University Library of Munich, Germany, revised Aug 2008.
    8. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, March.
    9. Johnson, Justin P. & Myatt, David P., 2015. "The properties of product line prices," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 182-188.
    10. Jiao, Wen & Yan, Hong & Pang, King-Wah, 2016. "Nonlinear pricing for stochastic container leasing system," Transportation Research Part B: Methodological, Elsevier, vol. 89(C), pages 1-18.
    11. Sergio Chayet & Panos Kouvelis & Dennis Z. Yu, 2011. "Product Variety and Capacity Investments in Congested Production Systems," Manufacturing & Service Operations Management, INFORMS, vol. 13(3), pages 390-403, July.
    12. Sato, Susumu, 2017. "Freemium as Optimal Menu Pricing," MPRA Paper 81599, University Library of Munich, Germany.
    13. (Catherine) Zhang, Jie & Savage, Scott J. & Chen, Yongmin, 2015. "Consumer uncertainty and price discrimination through online coupons: An empirical study of restaurants in Shanghai," Information Economics and Policy, Elsevier, vol. 33(C), pages 43-55.
    14. Kutsal Dogan & Ernan Haruvy & Ram Rao, 2010. "Who should practice price discrimination using rebates in an asymmetric duopoly?," Quantitative Marketing and Economics (QME), Springer, vol. 8(1), pages 61-90, March.
    15. Akan, Mustafa & Ata, Barış & Dana, James D., 2015. "Revenue management by sequential screening," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 728-774.
    16. Anderson, Simon P. & Celik, Levent, 2015. "Product line design," Journal of Economic Theory, Elsevier, vol. 157(C), pages 517-526.
    17. repec:spr:annopr:v:250:y:2017:i:2:d:10.1007_s10479-014-1781-5 is not listed on IDEAS

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