Price and Output Effects of Oligopoly Price Discrimination Under Best-Response Asymmetry

Ki-Eun Rhee, Korea Advanced Institute of Science and Technology (KAIST) - College of Business has written on Price and Output Effects of Oligopoly Price Discrimination Under Best-Response Asymmetry.

ABSTRACT: When firms competitively price discriminate, best-response functions may exhibit either best-response symmetry (firms’ ranking of strong and weak markets coincide) or best-response asymmetry (one firm’s strong market is another firm’s weak market). It has been shown in Corts (1998) and many models of behavior-based price discrimination that prices of all firms may decrease in all markets with best-response asymmetry. While one may presume that total consumption will increase upon low prices by all firms in all markets, such output effect has not been explicitly shown. We provide conditions on demands that are necessary for an output to increase as a result of competitive price discrimination. In particular, we link the condition to cross-price elasticity between the firms and the industry-level elasticity to average market price.