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Imperfect price discrimination, market structure, and efficiency

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  • Qihong Liu
  • Konstantinos Serfes

Abstract

We introduce a flexible third-degree price discrimination framework by modeling the information firms possess about consumers' locations (preferences) on the Salop circle as a partition. Higher information quality is translated into a partition refinement. In the limit, we obtain the perfect price discrimination paradigm. We show that the free-entry equilibrium number of firms exhibits a U-shape as a function of the quality of information. This implies that price discrimination generates the most efficient free-entry outcome.

Suggested Citation

  • Qihong Liu & Konstantinos Serfes, 2005. "Imperfect price discrimination, market structure, and efficiency," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1191-1203, November.
    • Handle: RePEc:cje:issued:v:38:y:2005:i:4:p:1191-1203
    DOI: 10.1111/j.0008-4085.2005.00321.x
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    Cited by:

    1. Li, Youping & Shuai, Jie, 2019. "Monopolistic competition, price discrimination and welfare," Economics Letters, Elsevier, vol. 174(C), pages 114-117.
    2. Marco Alderighi & Claudio A. Piga, 2008. "The Circular City with Heterogenous Firms," Working Paper series 16_08, Rimini Centre for Economic Analysis.
    3. Fatemi, Farshad, 2010. "Information Acquisition and Price Discrimination," MPRA Paper 20399, University Library of Munich, Germany.
    4. Tulabandhula, Theja & Ouksel, Aris M. & Nguyen, Son The, 2023. "Impact of customer loyalty and differing firm costs on price discrimination in an infinite horizon setting," The Quarterly Review of Economics and Finance, Elsevier, vol. 88(C), pages 344-377.
    5. J Bouckaert & Hans Degryse, 2006. "Opt in versus Opt out: a free-entry analysis of privacy policies," Working Papers Department of Accountancy, Finance and Insurance (AFI), Leuven 500204, KU Leuven, Faculty of Economics and Business (FEB), Department of Accountancy, Finance and Insurance (AFI), Leuven.
    6. Gagan Goel & Vijay V. Vazirani, 2011. "A Perfect Price Discrimination Market Model with Production, and a Rational Convex Program for It," Mathematics of Operations Research, INFORMS, vol. 36(4), pages 762-782, November.
    7. Zhao Jiang & Dan Wu, 2022. "Targeting Precision in Imperfect Targeted Advertising: Implications for the Regulation of Market Structure and Efficiency," SAGE Open, , vol. 12(1), pages 21582440221, March.
    8. Qiang Gong & Qihong Liu & Yi Zhang, 2016. "Optimal product differentiation in a circular model," Journal of Economics, Springer, vol. 119(3), pages 219-252, November.
    9. Fraser Summerfield, 2016. "Matching Skill and Tasks: Cyclical Fluctuations in the Overqualification of New Hires," Working Paper series 16-08, Rimini Centre for Economic Analysis.
    10. Bouckaert, J.M.C. & Degryse, H.A., 2006. "Opt In versus Opt Out : A Free-Entry Analysis of Privacy Policies," Other publications TiSEM 17393c5d-1ed2-47ec-bc96-9, Tilburg University, School of Economics and Management.
    11. Liu, Qihong & Serfes, Konstantinos, 2007. "Market segmentation and collusive behavior," International Journal of Industrial Organization, Elsevier, vol. 25(2), pages 355-378, April.
    12. Theja Tulabandhula & Aris Ouksel & Son Nguyen, 2021. "Price Discrimination in the Presence of Customer Loyalty and Differing Firm Costs," Papers 2102.09620, arXiv.org, revised Jan 2022.

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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation

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