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The welfare effects of third-degree price discrimination

Author

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  • Simon GB Cowan
  • Simon Cowan

Abstract

The welfare effects of third-degree price discrimination are known to be negative when demand functions are linear, marginal cost is constant and all markets are served. This paper shows that discrimination lowers welfare for a more general class of demand functions. Demand varies across markets with additive and multiplicative shift factors. Total welfare (defined as consumer surplus plus profits) with discrimination is lower than with uniform pricing when the density function of consumer valuations satisfies a weak version of concavity that encompasses logconcavity. Most standard demand functions including linear, quadratic, probit, logit, exponential and iso-elastic ones, satisfy this assumption, which is also a weak sufficient condition for existence.

Suggested Citation

  • Simon GB Cowan & Simon Cowan, 2004. "The welfare effects of third-degree price discrimination," Economics Series Working Papers 205, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:205
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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper205.pdf
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    Citations

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    Cited by:

    1. Simon Cowan, 2016. "Welfare-increasing third-degree price discrimination," RAND Journal of Economics, RAND Corporation, vol. 47(2), pages 326-340, May.
    2. Tomohiro Ara & Arghya Ghosh, 2012. "Bargaining, Tariffs and Vertical Specialization," Discussion Papers 2012-14, School of Economics, The University of New South Wales.
    3. Alexandre de Cornière & Romain De Nijs, 2013. "Online Advertising and Privacy," Economics Series Working Papers 650, University of Oxford, Department of Economics.
    4. Iñaki Aguirre, 2008. "Output and misallocation effects in monopolistic third-degree price discrimination," Economics Bulletin, AccessEcon, vol. 4(11), pages 1-11.

    More about this item

    Keywords

    Price Discrimination; Monopoly;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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