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Can Price Discrimination be Bad for Firms and Good for All Consumers? A Theoretical Analysis of Cross-Market Price Constraints with Entry and Product Differentiation

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  • Azar, Ofer H.

Abstract

The article examines a differentiated-products duopoly model where the firms make entry decisions to two markets and then choose prices. The effects of product differentiation and entry costs are analyzed in two games: with and without price discrimination between the markets. Allowing price discrimination encourages more entry and tends to reduce prices and profits and to increase consumer welfare in both markets. The model suggests that firms might be better off if they agree not to price discriminate between different markets. It also suggests that when the market is not a natural monopoly, regulators should consider the effects of universal service requirements on entry before adopting them, because entry might be discouraged by such requirements, leading to less competitive markets.

Suggested Citation

  • Azar, Ofer H., 2002. "Can Price Discrimination be Bad for Firms and Good for All Consumers? A Theoretical Analysis of Cross-Market Price Constraints with Entry and Product Differentiation," MPRA Paper 4575, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:4575
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    References listed on IDEAS

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    1. Rajiv Lal & Carmen Matutes, 1989. "Price Competition in Multimarket Duopolies," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 516-537, Winter.
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    7. B. Douglas Bernheim & Michael D. Whinston, 1990. "Multimarket Contact and Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 1-26, Spring.
    8. Anton, James J. & Vander Weide, James H. & Vettas, Nikolaos, 2002. "Entry auctions and strategic behavior under cross-market price constraints," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 611-629, May.
    9. Owen R. Phillips & Charles F. Mason, 1996. "Market Regulation and Multimarket Rivalry," RAND Journal of Economics, The RAND Corporation, vol. 27(3), pages 596-617, Autumn.
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    Cited by:

    1. Sílvia Jorge & Cesaltina Pires, 2007. "Entry Decision and Pricing Policies," Working Papers de Economia (Economics Working Papers) 41, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.

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    More about this item

    Keywords

    Competitive Strategy; Cross-Market Price Constraints; Price Discrimination; Regulation; Product Differentiation; Entry; Duopoly; Universal Service Requirements;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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