Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Wednesday, February 20, 2013

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

Posted by D. Daniel Sokol

Yongmin Chen (University of Colorado) and Marius Schwartz (Georgetown) have written about 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.

http://lawprofessors.typepad.com/antitrustprof_blog/2013/02/beyond-price-discrimination-welfare-under-differential-pricing-when-costs-also-differ.html

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