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Output and Welfare Effects in the Classic Monopoly Price Discrimination Problem

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  • John Vickers
  • Simon Cowan

Abstract

This paper uses convexity arguments to determine the effects of monopolistic third-degree price discrimination on total output and welfare. We focus on benchmark cases, including constant demand elasticities, with constant curvature of inverse demand σ. We show how the effects of price discrimination depend on (a) the degree of curvature σ relative to zero (for output) and one (for welfare), and (b) whether low-price markets have greater curvature than high-price markets.

Suggested Citation

  • John Vickers & Simon Cowan, 2007. "Output and Welfare Effects in the Classic Monopoly Price Discrimination Problem," Economics Series Working Papers 355, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:355
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    References listed on IDEAS

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    1. repec:ebl:ecbull:v:4:y:2006:i:23:p:1-6 is not listed on IDEAS
    2. Simon Cowan, 2007. "The welfare effects of third-degree price discrimination with nonlinear demand functions," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 419-428, June.
    3. Iñaki Aguirre, 2006. "Monopolistic price discrimination and output effect under conditions of constant elasticity demand," Economics Bulletin, AccessEcon, vol. 4(23), pages 1-6.
    4. Schwartz, Marius, 1990. "Third-Degree Price Discrimination and Output: Generalizing a Welfare Result," American Economic Review, American Economic Association, vol. 80(5), pages 1259-1262, December.
    5. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-875, September.
    6. Formby, John P & Layson, Stephen K & Smith, W James, 1983. "Price Discrimination, 'Adjusted Concavity,' and Output Changes under Conditions of Constant Elasticity," Economic Journal, Royal Economic Society, vol. 93(372), pages 892-899, December.
    7. Nahata, Babu & Ostaszewski, Krzysztof & Sahoo, P K, 1990. "Direction of Price Changes in Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 80(5), pages 1254-1258, December.
    8. Shih, Jun-ji & Mai, Chao-cheng & Liu, Jung-chao, 1988. "A General Analysis of the Output Effect under Third-Degree Price Discrimination," Economic Journal, Royal Economic Society, vol. 98(389), pages 149-158, March.
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    Citations

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    Cited by:

    1. Ritz Robert A., 2009. "Cost Pass-Through under Delegation," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 8(1), pages 1-19, January.
    2. repec:ebl:ecbull:v:4:y:2008:i:11:p:1-11 is not listed on IDEAS
    3. Paolo Bertoletti, 2009. "On the output criterion for price discrimination," Economics Bulletin, AccessEcon, vol. 29(4), pages 2951-2956.
    4. Zhu Wang & Julian Wright, 2012. "Ad-valorem platform fees and efficient price discrimination," Working Paper 12-08, Federal Reserve Bank of Richmond.
    5. DavidP. Myatt & Chris Wallace, 2009. "Evolution, Teamwork and Collective Action: Production Targets in the Private Provision of Public Goods," Economic Journal, Royal Economic Society, vol. 119(534), pages 61-90, January.
    6. Iñaki Aguirre, 2008. "Output and misallocation effects in monopolistic third-degree price discrimination," Economics Bulletin, AccessEcon, vol. 4(11), pages 1-11.
    7. Aguirre Pérez, Iñaki, 2009. "Joan Robinson Was Almost Right: Output under Third-Degree Price Discrimination," IKERLANAK info:eu-repo/grantAgreeme, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.
    8. Simon GB Cowan & Simon Cowan, 2008. "When does third-degree price discrimination reduce social welfare, and when does it raise it?," Economics Series Working Papers 410, University of Oxford, Department of Economics.

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    More about this item

    Keywords

    Price Discrimination; Monopoly;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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