Differential Pricing When Costs Differ: A Welfare Analysis
This paper analyzes the welfare effects of monopoly differential pricing in the important but largely neglected case where marginal costs of service differ across consumer groups. Compared to uniform pricing, cost-based differential pricing generally raises total welfare. Although total output may fall or even its allocation across consumer groups may worsen, under a minor demand curvature condition at least one of these changes must be beneficial and dominate if the other is not. Aggregate consumer welfare also rises (under a mildly tighter condition). The source of consumer gains is not cost savings from output reallocation, which flow to the firm. Rather, to induce output reallocation the firm must vary its prices, thereby creating price dispersion without an upward bias in the average price. This improves consumer welfare even in cases where output falls. We contrast these results with those in the extensive literature on third-degree price discrimination and, furthermore, provide sufficient conditions for beneficial differential pricing when both demand elasticities and costs differ.
|Date of creation:||21 Apr 2013|
|Date of revision:|
|Contact details of provider:|| Postal: Georgetown University Department of Economics Washington, DC 20057-1036|
Web page: http://econ.georgetown.edu/
|Order Information:|| Postal: Roger Lagunoff Professor of Economics Georgetown University Department of Economics Washington, DC 20057-1036|
Web: http://econ.georgetown.edu/ Email:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Schmalensee, Richard, 1981.
"Output and Welfare Implications of Monopolistic Third-Degree Price Discrimination,"
American Economic Review,
American Economic Association, vol. 71(1), pages 242-47, March.
- Schmalensee, Richard., 1980. "Output and welfare implications of monopolistic third-degree price discrimination," Working papers 1095-80., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Cowan, Simon & Vickers, John & Aguirre Pérez, Iñaki, 2009.
"Monopoly Price Discrimination and Demand Curvature,"
2009-39, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.
- I�aki Aguirre & Simon Cowan & John Vickers, 2010. "Monopoly Price Discrimination and Demand Curvature," American Economic Review, American Economic Association, vol. 100(4), pages 1601-15, September.
- Hausman, J.A. & Mackie-Mason, J.K., 1988.
"Price Discrimination And Patent Policy,"
88-13, Michigan - Center for Research on Economic & Social Theory.
- Jonathan E. Nuechterlein & Philip J. Weiser, 2007. "Digital Crossroads: American Telecommunications Policy in the Internet Age," MIT Press Books, The MIT Press, edition 1, volume 1, number 026264066x, June.
- Simon GB Cowan & Simon Cowan, 2009.
"Third-Degree Price Discrimination and Consumer Surplus,"
Economics Series Working Papers
462, University of Oxford, Department of Economics.
- Simon Cowan, 2012. "Third-Degree Price Discrimination and Consumer Surplus," Journal of Industrial Economics, Wiley Blackwell, vol. 60(2), pages 333-345, 06.
- Armstrong, Mark & Porter, Robert, 2007. "Preface to the Handbook of Industrial Organization, Volume 3," Handbook of Industrial Organization, Elsevier.
- Schwartz, Marius, 1990. "Third-Degree Price Discrimination and Output: Generalizing a Welfare Result," American Economic Review, American Economic Association, vol. 80(5), pages 1259-62, December.
- Glenn Ellison, 2005. "A Model of Add-On Pricing," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 585-637.
- Layson, Stephen K, 1998. "Third-Degree Price Discrimination with Interdependent Demands," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 511-24, December.
- Paolo Bertoletti, 2009. "On the output criterion for price discrimination," Economics Bulletin, AccessEcon, vol. 29(4), pages 2951-2956.
- Nahata, Babu & Ostaszewski, Krzysztof & Sahoo, P K, 1990. "Direction of Price Changes in Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 80(5), pages 1254-58, December.
- Mark Armstrong & John Vickers, 1991. "Welfare Effects of Price Discrimination by a Regulated Monopolist," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 571-581, Winter.
When requesting a correction, please mention this item's handle: RePEc:geo:guwopa:gueconwpa~13-13-01. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marcia Suss)
If references are entirely missing, you can add them using this form.