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The Welfare Effects of Regulating the Number of Market Segments

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  • Yann Braouezec

    () (IESEG School of Management (LEM-CNRS))

Abstract

We consider a model in which a profit-maximizing organization called the monopolist faces N _ 2 different (micro) market segments while the number k of market segments is chosen the regulator, where k is an integer between 1 and N. Unless k = 1 or k = N, the monopolist's profit maximization is a mixed-integer programming problem, the solution of which is called the optimal profit policy. When demands are linear, we show that it is always worthwhile to regulate the number of market segments since the value of k that maximizes the social welfare under the optimal profit policy is never greater than a critical threshold _k. This result allows us to disentangle the good aspect of price discrimination, the so-called output effect, from the bad one, that we call the pure profit effect. Further results are provided for the specific case of parallel demands. Non-linear demands are also briefly considered.

Suggested Citation

  • Yann Braouezec, 2013. "The Welfare Effects of Regulating the Number of Market Segments," Working Papers 2013-ECO-11, IESEG School of Management.
  • Handle: RePEc:ies:wpaper:e201311
    as

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    References listed on IDEAS

    as
    1. Malueg, David A. & Schwartz, Marius, 1994. "Parallel imports, demand dispersion, and international price discrimination," Journal of International Economics, Elsevier, vol. 37(3-4), pages 167-195, November.
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    7. Schmalensee, Richard, 1981. "Output and Welfare Implications of Monopolistic Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 71(1), pages 242-247, March.
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    12. Steinberg, Richard & Weisbrod, Burton A., 2005. "Nonprofits with distributional objectives: price discrimination and corner solutions," Journal of Public Economics, Elsevier, vol. 89(11-12), pages 2205-2230, December.
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    More about this item

    Keywords

    Economics; pricing; market segmentation; direct price discrimination; regulation;

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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