Third-Degree Price Discrimination: Apology Not Necessary |
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Authors: | Edward J Lopez David J Molina |
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Institution: | (1) San Jose State University, One Washington Square, San Jose, CA 95192-0114, USA;(2) University of North Texas, P.O. Box 311457, Denton, TX 76203-1457, USA |
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Abstract: | Applied work in price discrimination often treats demand curves among multiple market segments as algebraically additive.
Yet the welfare effects of multi-market (third degree) price discrimination depend on how the demand segments are added. Treating
demands as geometrically additive yields the well known result that discrimination absent an increase in production diminishes
Marshallian surplus. But if demands are treated as algebraically additive then discrimination increases welfare over uniform
pricing. Quantity is identical in the three cases, so the effect is not due to market opening. Nor is the effect due to scale
economies since marginal cost is assumed constant. Profit is always greater under discrimination, so the effect is due to
distributional changes in consumer surplus. The model is restricted to linear demands and constant marginal cost but can be
generalized for future work and policy analysis. |
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Keywords: | |
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