The Welfare Effects of Third-Degree Price Discrimination in a Differentiated Oligopoly

Posted by D. Daniel Sokol

Takanori Adachi (School of Economics, Nagoya University) and Noriaki Matsushima (Institute of Social and Economic Research, Osaka University) explore The Welfare Effects of Third-Degree Price Discrimination in a Differentiated Oligopoly.

ABSTRACT: This paper studies the welfare effects of third-degree price discrimination under oligopolistic competition with horizontal product differentiation. We derive a necessary and sufficient condition for price discrimination to improve social welfare: the degree of substitution must be sufficiently greater in the "strong" market (where the discriminatory price is higher than the uniform price) than in the "weak" market (where it is lower). It is verified, however, that consumer surplus is never improved; social welfare improves solely due to an increase in the firms' profits.