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Banning Price Discrimination under Imperfect Competition: Evidence from Colombia's Broadband

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  • Juan Sebastian Vélez-Velásquez

Abstract

Economic theory is inconclusive regarding the effects of banning third-degree price discrimination under imperfect competition because they depend on how the competing firms rank their market segments. When, relative to uniform pricing, all competitors want higher prices in the same market segments, a ban on price discrimination will reduce profits and benefit some consumers at the expense of others. If, instead, some firms want to charge higher prices in segments where their competitors want to charge lower prices, price discrimination increases competition driving all prices down. In this case, forcing the firms to charge uniform prices can increase their profits and reduce consumer surplus. We use data on Colombian broadband subscriptions to estimate the demand for internet services. Estimated preferences and assumptions about competition are used to simulate a scenario in which firms lose their ability to price discriminate. Our results show large effects on consumer surplus and large effects on firms’ profits. Aggregate profits increase but the effects for individual firms are heterogeneous. The effects on consumer welfare vary by city. In most cities, a uniform price regime causes large welfare transfers from low-income households towards high-income households and in a few cities, prices in all segments rise. Poorer households respond to the increase in prices by subscribing to internet plans with slower download speed. **** La teoría económica no es muy concluyente con respecto a los efectos de pasar de un régimen de discriminación de precios de tercer grado a un régimen de precio uniforme en un ambiente de competencia imperfecta, porque dichos efectos dependen de como las firmas que compiten ranquean los segmentos de mercado. Si las firmas coinciden en el ranking que hacen de los segmentos de mercado, un régimen de precio uniforme reduce los beneficios de la firma comparado con los beneficios que harían bajo discriminación. Si en cambio, las firmas tienen diferentes rankings para los segmentos de mercado, el precio uniforme puede ser más alto que los precios bajo discriminación, incrementando los beneficios de las firmas a expensas de los consumidores. En este articulo, usamos datos sobre suscripciones a servicios de internet en Colombia para estimar la demanda por dichos servicios. Además hacemos supuestos sobre la forma en que compiten las firmas lo que nos perimte simular equilibrios en los que las firmas cobran precios uniformes. Los resultados muestra grandes transferencias entre grupos de consumidores y moderados efectos sobre los beneficios de las firmas. Los beneficios agregados de las firmas aumentan ligeramente, pero los cambios en beneficios individuales son heterogéneos. Los efectos sobre el bienestar de los consumidores varían por ciudad. En la mayoría de las ciudades el precio uniforme causa transferencias desde hogares de bajos ingresos a hogares más ricos. Pero en unas cuantas ciudades los precios aumentan en todos los segmentos. Los hogares más pobres responden al aumento de precios sustituyendo por planes de menor calidad.

Suggested Citation

  • Juan Sebastian Vélez-Velásquez, 2020. "Banning Price Discrimination under Imperfect Competition: Evidence from Colombia's Broadband," Borradores de Economia 1148, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:borrec:1148
    DOI: https://doi.org/10.32468/be.1148
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    More about this item

    Keywords

    Price discrimination; Regulation; Market structure; Discriminación de precios; Regulación; Estructura de mercado;
    All these keywords.

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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