Price Discrimination Bans on Dominant Firms

Abstract:     
Competition authorities and regulatory agencies sometimes impose pricing restrictions on firms with substantial market power - the dominant firms. We analyze the welfare effects of a ban on behaviour-based price discrimination in a two-period setting where the market displays a competitive and a sheltered segment. A ban on higher-prices-to-sheltered-consumers decreases prices in the sheltered segment, relaxes competition in the competitive segment, increases the rival's profits, and may harm the dominant firm's profits. We show that a ban on higher-prices-to-sheltered-consumers increases the dominant firm's share of the first-period market. A ban on lower-prices-to-rival's-customers decreases prices in the competitive segment, lowers the rival's profits, and augments the consumer surplus. In particular, while second-period competition is relaxed by a ban on lower-prices-to-rival's-customers, first-period competition is intensified substantially, which leads to lower prices on-average over the two periods. Our findings indicate that a dynamic two-period analysis may lead to conclusions opposite to those drawn from a static one-period analysis.

Number of Pages in PDF File: 34

Keywords: dominant firms, price discrimination, competition policy, regulation

JEL Classification: D11

working papers series