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Market foreclosure, output and welfare under second-degree price discrimination

Author

Listed:
  • Yong Chao

    (University of Louisville)

  • Babu Nahata

    (University of Louisville)

Abstract

We compare second-degree price discrimination with uniform pricing using two linear demands, with and without the Spence-Mirrlees condition. We find that second-degree price discrimination can result in a welfare-enhancing market foreclosure (one market is excluded under second-degree price discrimination when both markets would be served under uniform pricing) because the resulting foreclosure can increase both the total output and the total surplus. Moreover, the total surplus under second-degree price discrimination could also be lower without the foreclosure. Our results are in stark contrast with the well-known results related to output and welfare effects under third-degree price discrimination.

Suggested Citation

  • Yong Chao & Babu Nahata, 2018. "Market foreclosure, output and welfare under second-degree price discrimination," Economics Bulletin, AccessEcon, vol. 38(4), pages 2116-2127.
    • Handle: RePEc:ebl:ecbull:eb-18-00757
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    References listed on IDEAS

    as
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    7. 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.
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    More about this item

    Keywords

    market foreclosure; welfare effects; second-degree price discrimination;
    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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