Capacity Constraint, Price Discrimination, and Oligopoly

In the presence of market power in oligopolistic environment, price discrimination is a natural phenomenon. Surprisingly this setting has not been analyzed in depth in the literature. In contrast with existing literature, e.g., Hazledine (2006) and Kutlu (2009), we consider quantity setting games where firms compete in two stages. In the first stage firms decide on the choice of capacity and in the second stage they decide on the structure of price discrimination where the level of price discrimination is exogenous. In contrast to Hazledine (2006) we find that in the Cournot framework the quantity-weighted average price depends on the level of price discrimination. We also find that in the Stackelberg framework both the leader and the follower price discriminate as opposed to Kutlu (2009) which concludes that the leader doesn't price discriminate. Moreover, it is discovered that both the players (even the follower) prefer to be in the Stackelberg framework rather than the Cournot framework when price discrimination exists. Comparing welfare under various settings, it is found that competition is not always good for the total welfare if price discrimination exists. desirable axioms.