On Anticompetitive Third-Degree Price Discrimination

Third-degree price discrimination increases output and welfare if certain local demand curvature conditions hold. These curvature conditions, known for nearly a century, have never been evaluated empirically before. To successfully evaluate the output and welfare effects of third-degree price discrimination, demand specification must be sufficiently flexible to allow for curvature heterogeneity across local markets. Otherwise, demand specification bakes-in empirical output and welfare predictions of price discrimination. I show that with the notable exception of logit demand, most other demands families predict output and welfare reductions as their elasticity and curvature are negatively correlated. I use supermarket scanner data to evaluate demand curvature conditions nonparametrically for thousands of chain-store-product combinations and show that, more often than not, third-degree price discrimination (local store pricing) decreases output and welfare relative to uniform pricing (chain-store pricing). Furthermore, I show that using output as a proxy for welfare as Robert Bork suggested overstates potential gains and understates potential damages of price discrimination.