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Market Foreclosure and the Welfare Impacts of Price Discrimination

Author

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  • Qihong Liu

    (University of Oklahoma)

Abstract

There is an extensive literature studying the welfare comparison of third-degree price discrimination vs. uniform pricing, typically under the assumption that all markets are served under uniform pricing. In this study, we allow market foreclosure and show that the welfare comparison of price discrimination vs. uniform pricing depends on whether market foreclosure is allowed. We also analyze how firms' foreclosure incentives vary with competition intensity. Our results show that an increase in competition intensity makes complete foreclosure less likely to be an equilibrium. On the other hand, the impact of competition intensity on partial foreclosure is non-monotonic. We also show that equilibrium under uniform pricing may feature strategic market foreclosure, defined as committing not to serve a market when demand there is positive.

Suggested Citation

  • Qihong Liu, 2016. "Market Foreclosure and the Welfare Impacts of Price Discrimination," Economics Bulletin, AccessEcon, vol. 36(1), pages 337-348.
    • Handle: RePEc:ebl:ecbull:eb-15-00761
    as

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    References listed on IDEAS

    as
    1. Krishnendu Ghosh Dastidar, 2006. "On Third‐Degree Price Discrimination In Oligopoly," Manchester School, University of Manchester, vol. 74(2), pages 231-249, March.
    2. Schmalensee, Richard, 1981. "Output and Welfare Implications of Monopolistic Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 71(1), pages 242-247, March.
    3. Blundell,Richard & Newey,Whitney K. & Persson,Torsten (ed.), 2006. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521871525, November.
    4. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    5. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-142, March.
    6. Blundell,Richard & Newey,Whitney K. & Persson,Torsten (ed.), 2006. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521692083, November.
    7. Kenneth S. Corts, 1998. "Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 306-323, Summer.
    8. Holmes, Thomas J, 1989. "The Effects of Third-Degree Price Discrimination in Oligopoly," American Economic Review, American Economic Association, vol. 79(1), pages 244-250, March.
    9. Mian Dai & Qihong Liu & Konstantinos Serfes, 2014. "Is the Effect of Competition on Price Dispersion Nonmonotonic? Evidence from the U.S. Airline Industry," The Review of Economics and Statistics, MIT Press, vol. 96(1), pages 161-170, March.
    10. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 34, pages 2221-2299, Elsevier.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Price discrimination; Market foreclosure; Strategic market foreclosure.;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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