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Is Perfect Price Discrimination Really Efficient? An Analysis of Free Entry

Author

Listed:
  • V. Bhaskar

    () (University of Essex)

  • Ted To

    () (Bureau of Labor Statistics)

Abstract

We analyze models of product differentiation with perfect price discrimination and free entry. With a fixed number of firms, and in the absence of coordination failures, perfect price discrimination provides incentives for firms to choose product characteristics in a socially optimal way. However, with free entry, the number of firms is always excessive. Our results apply to a large class of models of product differentiation. They also apply to models of common agency or lobbying with free entry and imply that one has excessive entry into the ranks of the principals.

Suggested Citation

  • V. Bhaskar & Ted To, 2004. "Is Perfect Price Discrimination Really Efficient? An Analysis of Free Entry," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 762-776, Winter.
  • Handle: RePEc:rje:randje:v:35:y:2004:4:p:762-776
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Encaoua David & Hollander Abraham, 2007. "First-Degree Discrimination by a Duopoly: Pricing and Quality Choice," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 1-21, May.
    2. Vidyanand Choudhary & Anindya Ghose & Tridas Mukhopadhyay & Uday Rajan, 2005. "Personalized Pricing and Quality Differentiation," Management Science, INFORMS, vol. 51(7), pages 1120-1130, July.
    3. Marco Alderighi & Claudio A. Piga, 2008. "The Circular City with Heterogenous Firms," Working Paper series 16_08, Rimini Centre for Economic Analysis.
    4. Hans Degryse & Luc Laeven & Steven Ongena, 2009. "The Impact of Organizational Structure and Lending Technology on Banking Competition," Review of Finance, European Finance Association, vol. 13(2), pages 225-259.
    5. Chiesa, Gabriella & Denicolò, Vincenzo, 2012. "Competition in non-linear pricing, market concentration and mergers," Economics Letters, Elsevier, vol. 117(2), pages 414-417.
    6. Fatemi, Farshad, 2010. "Information Acquisition and Price Discrimination," MPRA Paper 20399, University Library of Munich, Germany.
    7. Weeds, Helen, 2012. "Superstars and the long tail: The impact of technology on market structure in media industries," Information Economics and Policy, Elsevier, vol. 24(1), pages 60-68.
    8. Myrna Wooders & Ben Zissimos, 2003. "Hotelling Tax Competition," CESifo Working Paper Series 932, CESifo Group Munich.
    9. Konishi, Yoshifumi, 2011. "Efficiency properties of binary ecolabeling," Resource and Energy Economics, Elsevier, vol. 33(4), pages 798-819.
    10. Jan Bouckaert & Hans Degryse, 2013. "Default Options and Social Welfare: Opt In versus Opt Out," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 169(3), pages 468-489, September.
    11. Leeson, Peter T. & Sobel, Russell S., 2008. "Costly price discrimination," Economics Letters, Elsevier, vol. 99(1), pages 206-208, April.
    12. Liu Qihong & Shuai Jie, 2016. "Price Discrimination with Varying Qualities of Information," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(2), pages 1093-1121, April.
    13. Jan Bouckaert & Hans Degryse, 2006. "Opt In Versus Opt Out: A Free-Entry Analysis of Privacy Policies," CESifo Working Paper Series 1831, CESifo Group Munich.
    14. Mark Armstrong, 2005. "Recent Developments in the Economics of Price Discrimination," Industrial Organization 0511004, EconWPA.
    15. Jerome Adda & Samuel Berlinski & V. Bhaskar & Stephen Machin, 2009. "Market regulation and firm performance: the case of smoking bans in the UK," IFS Working Papers W09/13, Institute for Fiscal Studies.
    16. Chiesa, Gabriella & Denicolò, Vincenzo, 2009. "Trading with a common agent under complete information: A characterization of Nash equilibria," Journal of Economic Theory, Elsevier, vol. 144(1), pages 296-311, January.
    17. Qiang Gong & Qihong Liu & Yi Zhang, 2016. "Optimal product differentiation in a circular model," Journal of Economics, Springer, vol. 119(3), pages 219-252, November.
    18. Mark V. Pauly, 2007. "Drug and vaccine pricing and innovation: what is the story?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(4-5), pages 407-413.
    19. Gregory M Randolph, 2012. "Price Discrimination with Producer & Consumer Transaction Costs," Economics Bulletin, AccessEcon, vol. 32(1), pages 370-375.

    More about this item

    Keywords

    Production; Pricing; and Market Structure; Size Distribution of Firms (Concentration; Product Differentiation; Entry and Exit) Market Structure; Firm Strategy; and Market Performance: Oligopoly and Other Imperfect Markets; monopolistic competition; contestable markets Differentiation; Entry; Firm; Firms; Free Entry; Price Discrimination; Product Differentiation;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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