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Third-Degree Price Discrimination and Consumer Surplus

Author

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  • Simon GB Cowan
  • Simon Cowan

Abstract

This paper presents simple conditions for monopoly third-degree price discrimination to have negative or positive effects on aggregate consumer surplus. Consumer surplus is often reduced by discrimination, for example when total welfare (consumer surplus and profits) falls. Surplus increases with discrimination, however, in two cases: first, when the marginal revenues without discrimination are close together and inverse demand in the market where the price will fall with discrimination is more convex; second, when inverse demand functions are highly convex and the discriminatory prices are close together.

Suggested Citation

  • Simon GB Cowan & Simon Cowan, 2009. "Third-Degree Price Discrimination and Consumer Surplus," Economics Series Working Papers 462, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:462
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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper462.pdf
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    References listed on IDEAS

    as
    1. Jeremy Bulow & Paul Klemperer, 2009. "Price Controls and Consumer Surplus," Economics Papers 2009-W07, Economics Group, Nuffield College, University of Oxford.
    2. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
    3. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
    4. Holmes, Thomas J, 1989. "The Effects of Third-Degree Price Discrimination in Oligopoly," American Economic Review, American Economic Association, vol. 79(1), pages 244-250, March.
    5. Malueg, David A. & Snyder, Christopher M., 2006. "Bounding the relative profitability of price discrimination," International Journal of Industrial Organization, Elsevier, vol. 24(5), pages 995-1011, September.
    6. T. Beard & Michael Stern, 2008. "Bounding consumer surplus by monopoly profits," Journal of Regulatory Economics, Springer, vol. 34(1), pages 86-94, August.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Third-degree price discrimination; Monopoly; Consumer surplus;

    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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