Friday, January 30, 2015

Third-degree Price Discrimination in the Presence of Congestion Externality

Achim I. Czerny (VU University Amsterdam, the Netherlands) and Anming Zhang (The University of British Columbia, Canada) explain Third-degree Price Discrimination in the Presence of Congestion Externality.

ABSTRACT: This paper analyzes third-degree price discrimination of a monopoly airline in the presence of congestion externality when all markets are served. The model features the business-passenger and leisure-passenger markets where business passengers exhibit a higher time valuation, and a less price-elastic demand, than leisure passengers. Our main result is the identification of the time-valuation effect of price discrimination, which can work in the opposite direction as the well-known output effect on welfare. This time-valuation effect clearly explains why discriminating prices can improve welfare even when this is associated with a reduction in aggregate output.

https://lawprofessors.typepad.com/antitrustprof_blog/2015/01/third-degree-price-discrimination-in-the-presence-of-congestion-externality.html

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