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The Welfare Effects of Regulating the Number of Market Segments

  • Yann Braouezec


    (IESEG School of Management (LEM-CNRS))

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    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.

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    Paper provided by IESEG School of Management in its series Working Papers with number 2013-ECO-11.

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    Length: 28 pages
    Date of creation: Dec 2013
    Date of revision:
    Handle: RePEc:ies:wpaper:e201311
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    1. Cowan, Simon & Vickers, John & Aguirre Pérez, Iñaki, 2009. "Monopoly Price Discrimination and Demand Curvature," IKERLANAK 2009-39, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.
    2. Yong He & Guang-Zhen Sun, 2006. "Income Dispersion And Price Discrimination," Pacific Economic Review, Wiley Blackwell, vol. 11(1), pages 59-74, 02.
    3. Victor Kaftal & Debashis Pal, 2008. "Third Degree Price Discrimination in Linear-Demand Markets: Effects on Number of Markets Served and Social Welfare," Southern Economic Journal, Southern Economic Association, vol. 75(2), pages 558-573, October.
    4. 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.
    5. John Hartwick, 1976. "Optimal Price Discrimination," Working Papers 237, Queen's University, Department of Economics.
    6. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-75, September.
    7. Malueg, D.A. & Schwartz, M., 1993. "Parallel Imports, Demand Dispersion and International Price Discrimination," Papers 93-6, U.S. Department of Justice - Antitrust Division.
    8. Breton, M. le & Weber, S., 1992. "Stability of Coalition Structures and the Principle of Optimal Partitioning," Papers 93-6, York (Canada) - Department of Economics.
    9. Belan, Pascal & Gauthier, Stéphane & Laroque, Guy, 2008. "Optimal grouping of commodities for indirect taxation," Journal of Public Economics, Elsevier, vol. 92(7), pages 1738-1750, July.
    10. 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.
    11. 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.
    12. Phlips, Louis, 1988. " Price Discrimination: A Survey of the Theory," Journal of Economic Surveys, Wiley Blackwell, vol. 2(2), pages 135-67.
    13. Braouezec, Yann, 2012. "Customer-class pricing, parallel trade and the optimal number of market segments," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 605-614.
    14. Le Grand, Julian, 1975. "Public Price Discrimination and Aid to Low Income Groups," Economica, London School of Economics and Political Science, vol. 42(165), pages 32-42, February.
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