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A Note on Pricing With Market Power: Third-Degree Price Discrimination With Quality-Differentiated Demand

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  • Charles F. Adams

Abstract

The article points up limitations in the standard undergraduate treatment of third-degree price discrimination by monopolists. While such treatments allude to qualitative distinctions between higher and lower priced alternatives, failure to capture those distinctions in underlying cost and demand structures results in only partial and possibly misleading conclusions about the nature and consequences of such discrimination. Deriving quality-differentiated linear demand and cost structures from the constructs underlying undergraduate microeconomics, the article compares the standard analysis of price discrimination with one that explicitly accounts for quality choices and monopoly power in manipulating those choices. The analysis illustrates the potential for substantially greater monopoly profits and greater efficiency losses by forcing some groups of consumers into suboptimal quality choices once quality variations are explicitly accounted for. JEL Classifications: A1, A22, D11, D21, D42

Suggested Citation

  • Charles F. Adams, 2019. "A Note on Pricing With Market Power: Third-Degree Price Discrimination With Quality-Differentiated Demand," The American Economist, Sage Publications, vol. 64(2), pages 183-187, October.
    • Handle: RePEc:sae:amerec:v:64:y:2019:i:2:p:183-187
    DOI: 10.1177/0569434519835777
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    References listed on IDEAS

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    1. Hanemann, W Michael, 1984. "Discrete-Continuous Models of Consumer Demand," Econometrica, Econometric Society, vol. 52(3), pages 541-561, May.
    2. repec:hal:spmain:info:hdl:2441/f0uohitsgqh8dhk9820172631 is not listed on IDEAS
    3. Richard Blundell & Jean-Marc Robin, 2000. "Latent Separability: Grouping Goods without Weak Separability," Econometrica, Econometric Society, vol. 68(1), pages 53-84, January.
    4. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
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    Citations

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    Cited by:

    1. Zheng Zhang & Yingtong Wang & Qingchun Meng & Qiang Han, 2022. "Impact of Third-Degree Price Discrimination on Welfare under the Asymmetric Price Game," Mathematics, MDPI, vol. 10(8), pages 1-16, April.
    2. Charles F. Adams, 2020. "An Undergraduate Primer on Quality-Differentiated Demand," The American Economist, Sage Publications, vol. 65(2), pages 277-283, October.

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    More about this item

    Keywords

    third-degree price discrimination; quality differentiation; monopoly;
    All these keywords.

    JEL classification:

    • A1 - General Economics and Teaching - - General Economics
    • A22 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Undergraduate
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly

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