Can Price Discrimination be Bad for Firms and Good for All Consumers? A Theoretical Analysis of Cross-Market Price Constraints with Entry and Product Differentiation

Azar, Ofer H. (2002): Can Price Discrimination be Bad for Firms and Good for All Consumers? A Theoretical Analysis of Cross-Market Price Constraints with Entry and Product Differentiation. Published in: The B.E. Journal of Economic Analysis & Policy , Vol. 1, No. 3

Abstract

The article examines a differentiated-products duopoly model where the firms make entry decisions to two markets and then choose prices. The effects of product differentiation and entry costs are analyzed in two games: with and without price discrimination between the markets. Allowing price discrimination encourages more entry and tends to reduce prices and profits and to increase consumer welfare in both markets. The model suggests that firms might be better off if they agree not to price discriminate between different markets. It also suggests that when the market is not a natural monopoly, regulators should consider the effects of universal service requirements on entry before adopting them, because entry might be discouraged by such requirements, leading to less competitive markets.

• Item Type: MPRA Paper
• Institution: Northwestern University
• Language: English
• Keywords: Competitive Strategy; Cross-Market Price Constraints; Price Discrimination; Regulation; Product Differentiation; Entry; Duopoly; Universal Service Requirements
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; L - Industrial Organization > L5 - Regulation and Industrial Policy > L50 - General; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms

References

Anton, J.J., J.H. Vander Weide and N. Vettas (2002) ‘Entry Auctions and Strategic Behavior Under Cross-Market Price Constraints’, International Journal of Industrial Organization, 20, 611-629. Armstrong, M. and J. Vickers (1991) ‘Welfare Effects of Price Discrimination by a Regulated Monopolist’, RAND Journal of Economics, 22, 571-580. Armstrong, M. and J. Vickers (1993) ‘Price Discrimination, Competition and Regulation’, Journal of Industrial Economics, 41, 335-359. Bernheim, B.D. and M.D. Whinston (1990) ‘Multimarket Contact and Collusive Behavior’, RAND Journal of Economics, 21, 1-26. Bulow, J.I., J.D. Geanakoplos and P.D. Klemperer (1985) ‘Multimarket Oligopoly: Strategic Substitutes and Complements’, Journal of Political Economy, 93, 488-511. Corts, K.S. (1998) ‘Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment’, Rand Journal of Economics, 29, 306-323. DeGraba, P.J. (1987) ‘The Effects of Price Restrictions on Competition Between National and Local Firms’, RAND Journal of Economics, 18, 333-347. Lal, R. and C. Matutes (1989) ‘Price Competition in Multimarket Duopolies’, RAND Journal of Economics, 20, 516-537. Leontief, W. (1940) ‘The Theory of Limited and Unlimited Discrimination’, Quarterly Journal of Economics, 54, 490-501. Phillips, O.R. and C.F. Mason (1996) ‘Market Regulation and Multimarket Rivalry’, RAND Journal of Economics, 27, 596-617. Prusa, T.J., 1994. Pricing behavior in the presence of antidumping law. Journal of Economic Integration 9, 260–289.