IDEAS home Printed from https://ideas.repec.org/p/oxf/wpaper/652.html
   My bibliography  Save this paper

Welfare-increasing third-degree price discrimination

Author

Listed:
  • Simon GB Cowan

Abstract

The welfare and output effects of monopoly third-degree price discrimination are analyzed when inverse demand functions are parallel. Welfare is higher with discrimination than with a uniform price when demand functions are derived from the logistic distribution, and from a more general class of distributions. The sufficient condition in Varian (1985) for a welfare increase holds for these demand functions. Total output is higher with discrimination for a large set of demand functions including those derived from strictly log-concave distributions with increasing cost pass-through, such as the normal, logistic and extreme value, and standard log-convex demands.

Suggested Citation

  • Simon GB Cowan, 2013. "Welfare-increasing third-degree price discrimination," Economics Series Working Papers 652, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:652
    as

    Download full text from publisher

    File URL: https://ora.ox.ac.uk/objects/uuid:232a5917-128b-407a-966c-8b507d80be27
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Gabaix, Xavier & Laibson, David & Li, Deyuan & Li, Hongyi & Resnick, Sidney & de Vries, Casper G., 2016. "The impact of competition on prices with numerous firms," Journal of Economic Theory, Elsevier, vol. 165(C), pages 1-24.
    2. Dirk Bergemann & Benjamin Brooks & Stephen Morris, 2015. "The Limits of Price Discrimination," American Economic Review, American Economic Association, vol. 105(3), pages 921-957, March.
    3. Mark Bagnoli & Ted Bergstrom, 2006. "Log-concave probability and its applications," Studies in Economic Theory, in: Charalambos D. Aliprantis & Rosa L. Matzkin & Daniel L. McFadden & James C. Moore & Nicholas C. Yann (ed.), Rationality and Equilibrium, pages 217-241, Springer.
    4. repec:ecj:econjl:v:122:y:2012:i::p:332-338 is not listed on IDEAS
    5. Simon Cowan, 2007. "The welfare effects of third-degree price discrimination with nonlinear demand functions," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 419-428, June.
    6. W. Leontief, 1940. "The Theory of Limited and Unlimited Discrimination," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 54(3), pages 490-501.
    7. Yongmin Chen & Marius Schwartz, 2015. "Differential pricing when costs differ: a welfare analysis," RAND Journal of Economics, RAND Corporation, vol. 46(2), pages 442-460, June.
    8. 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.
    9. Iñaki Aguirre & Simon G. Cowan, 2015. "Monopoly price discrimination with constant elasticity demand," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(2), pages 329-340, October.
    10. 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, John Wiley & Sons, vol. 75(2), pages 558-573, August.
    11. E. Glen Weyl & Michal Fabinger, 2013. "Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition," Journal of Political Economy, University of Chicago Press, vol. 121(3), pages 528-583.
    12. Aguirre Pérez, Iñaki, 2009. "Joan Robinson Was Almost Right: Output under Third-Degree Price Discrimination," IKERLANAK 2009-38, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.
    13. Aguirre Pérez, Iñaki, 2009. "Joan Robinson Was Almost Right: Output under Third-Degree Price Discrimination," IKERLANAK info:eu-repo/grantAgreeme, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.
    14. Iñaki Aguirre, 2006. "Monopolistic price discrimination and output effect under conditions of constant elasticity demand," Economics Bulletin, AccessEcon, vol. 4(23), pages 1-6.
    15. Varian, Hal R., 1989. "Price discrimination," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 10, pages 597-654, Elsevier.
    16. Simon Cowan, 2012. "Third-Degree Price Discrimination and Consumer Surplus," Journal of Industrial Economics, Wiley Blackwell, vol. 60(2), pages 333-345, June.
    17. E. Weyl & Michal Fabinger, 2015. "A Tractable Approach to Pass-Through Patterns," 2015 Meeting Papers 747, Society for Economic Dynamics.
    18. Justin P. Johnson & David P. Myatt, 2006. "On the Simple Economics of Advertising, Marketing, and Product Design," American Economic Review, American Economic Association, vol. 96(3), pages 756-784, June.
    19. Iñaki Aguirre & Simon Cowan & John Vickers, 2010. "Monopoly Price Discrimination and Demand Curvature," American Economic Review, American Economic Association, vol. 100(4), pages 1601-1615, September.
    20. 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.
    21. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-875, September.
    22. Hal R. Varian, 2012. "Revealed Preference and its Applications," Economic Journal, Royal Economic Society, vol. 122(560), pages 332-338, May.
    23. 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.
    24. 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, John Wiley & Sons, vol. 75(2), pages 558-573, October.
    25. 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 1254-1258, December.
    26. Shih, Jun-ji & Mai, Chao-cheng & Liu, Jung-chao, 1988. "A General Analysis of the Output Effect under Third-Degree Price Discrimination," Economic Journal, Royal Economic Society, vol. 98(389), pages 149-158, March.
    27. R. Schmalensee & R. Willig (ed.), 1989. "Handbook of Industrial Organization," Handbook of Industrial Organization, Elsevier, edition 1, volume 2, number 2.
    28. R. Schmalensee & R. Willig (ed.), 1989. "Handbook of Industrial Organization," Handbook of Industrial Organization, Elsevier, edition 1, volume 1, number 1.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Shota Ichihashi, 2020. "Online Privacy and Information Disclosure by Consumers," American Economic Review, American Economic Association, vol. 110(2), pages 569-595, February.
    2. Romain Lestage, 2021. "Input price discrimination and non-controlling vertical shareholding," Journal of Regulatory Economics, Springer, vol. 59(3), pages 226-250, June.
    3. Jong-Hee Hahn & Chan KIm, 2018. "Input price discrimination with differentiated final products," Working papers 2018rwp-118, Yonsei University, Yonsei Economics Research Institute.
    4. Dirk Bergemann & Benjamin Brooks & Stephen Morris, 2015. "The Limits of Price Discrimination," American Economic Review, American Economic Association, vol. 105(3), pages 921-957, March.
    5. John Vickers, 2020. "Direct Welfare Analysis of Relative Price Regulation," Journal of Industrial Economics, Wiley Blackwell, vol. 68(1), pages 40-51, March.
    6. repec:cwl:cwldpp:1896rrr is not listed on IDEAS
    7. Adam N. Elmachtoub & Vishal Gupta & Michael L. Hamilton, 2021. "The Value of Personalized Pricing," Management Science, INFORMS, vol. 67(10), pages 6055-6070, October.
    8. Takanori Adachi & Michal Fabinger, 2017. "Multi-Dimensional Pass-Through, Incidence, and the Welfare Burden of Taxation in Oligopoly," CIRJE F-Series CIRJE-F-1040, CIRJE, Faculty of Economics, University of Tokyo.
    9. Aguirre, Iñaki, 2019. "Oligopoly price discrimination, competitive pressure and total output," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 13, pages 1-16.
    10. Miklós-Thal, Jeanine & Shaffer, Greg, 2021. "Third-degree price discrimination in oligopoly with endogenous input costs," International Journal of Industrial Organization, Elsevier, vol. 79(C).
    11. Felipe Avilés-Lucero & Andre Boik, 2018. "Wholesale most-favored-nation clauses and price discrimination with negative consumption externalities: equivalence results," Journal of Regulatory Economics, Springer, vol. 54(3), pages 266-291, December.
    12. Zhu Wang & Julian Wright, 2018. "Should platforms be allowed to charge ad valorem fees?," Journal of Industrial Economics, Wiley Blackwell, vol. 66(3), pages 739-760, September.
    13. Dertwinkel-Kalt, Markus & Wey, Christian, 2020. "Third-degree price discrimination in oligopoly when markets are covered," DICE Discussion Papers 336, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    14. Takanori Adachi & Muhammad Michal Fabinger, 2017. "Multi-Dimensional Pass-Through, Incidence, and the Welfare Burden of Taxation in Oligopoly," CIRJE F-Series CIRJE-F-1040, CIRJE, Faculty of Economics, University of Tokyo.
    15. Joseph E. Harrington, 2022. "The Effect of Outsourcing Pricing Algorithms on Market Competition," Management Science, INFORMS, vol. 68(9), pages 6889-6906, September.
    16. Kai Hao Yang & Philipp Strack, 2023. "Privacy Preserving Signals," Cowles Foundation Discussion Papers 2379, Cowles Foundation for Research in Economics, Yale University.
    17. Tuo Wang & Michael Y. Hu, 2019. "Differential pricing with consumers’ valuation uncertainty by a monopoly," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 18(3), pages 247-255, June.
    18. Takanori Adachi & Michal Fabinger, 2017. "Multi-Dimensional Pass-Through and Welfare Measures under Imperfect Competition," Papers 1702.04967, arXiv.org, revised Dec 2018.
    19. Alireza Fallah & Michael I. Jordan & Ali Makhdoumi & Azarakhsh Malekian, 2024. "The Limits of Price Discrimination Under Privacy Constraints," Papers 2402.08223, arXiv.org, revised Feb 2024.
    20. Czerny, Achim I. & Zhang, Anming, 2014. "Airport congestion pricing when airlines price discriminate," Transportation Research Part B: Methodological, Elsevier, vol. 65(C), pages 77-89.
    21. repec:cwl:cwldpp:1896rr is not listed on IDEAS

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Iñaki Aguirre & Simon G. Cowan, 2015. "Monopoly price discrimination with constant elasticity demand," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(2), pages 329-340, October.
    2. Aguirre Iñaki, 2016. "On the Economics of the “Meeting Competition Defense” Under the Robinson–Patman Act," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(3), pages 1213-1238, September.
    3. Yongmin Chen & Marius Schwartz, 2015. "Differential pricing when costs differ: a welfare analysis," RAND Journal of Economics, RAND Corporation, vol. 46(2), pages 442-460, June.
    4. Simon GB Cowan & Simon Cowan, 2008. "When does third-degree price discrimination reduce social welfare, and when does it raise it?," Economics Series Working Papers 410, University of Oxford, Department of Economics.
    5. Adachi, Takanori, 2023. "A sufficient statistics approach for welfare analysis of oligopolistic third‐degree price discrimination," International Journal of Industrial Organization, Elsevier, vol. 86(C).
    6. Iñaki Aguirre & Simon Cowan & John Vickers, 2010. "Monopoly Price Discrimination and Demand Curvature," American Economic Review, American Economic Association, vol. 100(4), pages 1601-1615, September.
    7. Aguirre Pérez, Iñaki, 2011. "Multimarket Competition and Welfare Effects of Price discrimination," IKERLANAK info:eu-repo/grantAgreeme, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.
    8. Zhu Wang & Julian Wright, 2018. "Should platforms be allowed to charge ad valorem fees?," Journal of Industrial Economics, Wiley Blackwell, vol. 66(3), pages 739-760, September.
    9. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 34, pages 2221-2299, Elsevier.
    10. E. Glen Weyl & Michal Fabinger, 2013. "Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition," Journal of Political Economy, University of Chicago Press, vol. 121(3), pages 528-583.
    11. Takanori Adachi & Noriaki Matsushima, 2014. "The Welfare Effects Of Third-Degree Price Discrimination In A Differentiated Oligopoly," Economic Inquiry, Western Economic Association International, vol. 52(3), pages 1231-1244, July.
    12. Aguirre, Iñaki, 2019. "Oligopoly price discrimination, competitive pressure and total output," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 13, pages 1-16.
    13. Markus Dertwinkel-Kalt & Christian Wey, 2020. "Third-Degree Price Discrimination in Oligopoly When Markets Are Covered," CESifo Working Paper Series 8785, CESifo.
    14. Inaki Aguirre, 2012. "Welfare Effects of Third-Degree Price Discrimination: Ippolito Meets Schmalensee and Varian," Chapters, in: Rosario Laratta (ed.), Social Welfare, IntechOpen.
    15. Yann Braouezec, 2009. "Incomplete third-degree price discrimination, and market partition problem," Economics Bulletin, AccessEcon, vol. 29(4), pages 2908-2917.
    16. Jong-Hee Hahn & Chan KIm, 2018. "Input price discrimination with differentiated final products," Working papers 2018rwp-118, Yonsei University, Yonsei Economics Research Institute.
    17. Iñaki Aguirre, 2008. "Output and misallocation effects in monopolistic third-degree price discrimination," Economics Bulletin, AccessEcon, vol. 4(11), pages 1-11.
    18. Aguirre Pérez, Iñaki, 2011. "Welfare Effects of Third-Degree Price Discrimination: Ippolito Meets Schmalensee and Varian," IKERLANAK 2011-54, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.
    19. Simon P. Anderson & Régis Renault, 2011. "Price Discrimination," Chapters, in: André de Palma & Robin Lindsey & Emile Quinet & Roger Vickerman (ed.), A Handbook of Transport Economics, chapter 22, Edward Elgar Publishing.
    20. Dirk Bergemann & Benjamin Brooks & Stephen Morris, 2015. "The Limits of Price Discrimination," American Economic Review, American Economic Association, vol. 105(3), pages 921-957, March.

    More about this item

    Keywords

    Third-degree price discrimination; monopoly; social welfare; output;
    All these keywords.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oxf:wpaper:652. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Anne Pouliquen (email available below). General contact details of provider: https://edirc.repec.org/data/sfeixuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.