Beyond price discrimination: welfare under differential pricing when costs also differ

Chen, Yongmin and Schwartz, Marius (2012): Beyond price discrimination: welfare under differential pricing when costs also differ.

Abstract

We extend the analysis of monopoly third-degree price discrimination to the empirically important case where marginal costs also differ between markets. Differential pricing then reallocates output to the lower-cost markets, hence welfare can increase even if total output does not, unlike under pure price discrimination. To induce output reallocation the firm varies its prices but---again, unlike under pure price discrimination---with no upward bias in the average price. Due to this price dispersion, differential pricing motivated solely by cost differences will increase consumer surplus (and total welfare) for a broad class of demand functions. We also provide sufficient conditions for beneficial differential pricing in the hybrid case where both demand elasticities and marginal costs differ.

• Item Type: MPRA Paper
• Language: English
• Keywords: price discrimination; differential pricing; price dispersion; add-on pricing
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance

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