Third-Degree Price Discrimination: Apology Not Necessary

Atlantic Economic Journal, Forthcoming

22 Pages Posted: 3 Aug 2010

See all articles by Edward J. Lopez

Edward J. Lopez

Western Carolina University

David J. Molina

University of North Texas

Date Written: June 4, 2010

Abstract

Applied work in price discrimination often treats demand curves among multiple market segments as algebraically additive. Yet the welfare effects of multi-market (third degree) price discrimination depend on the method by which demand segments are added. Treating demands as geometrically additive yields the well known result that discrimination absent an increase in production diminishes Marshallian surplus. But if demands are treated as algebraically additive then discrimination increases welfare relative to uniform pricing. Quantity is identical in the three cases, so the effect is not due to market opening. Nor is the effect due to scale economies since marginal cost is assumed constant. Profit is always greater under discrimination, so the effect is due to distributional changes in consumer surplus. The model is restricted to linear demands and constant marginal cost but can be generalized for future work and policy analysis.

Keywords: price discrimination, third-degree, consumer surplus, monopoly regulation

JEL Classification: D21, L12, L59

Suggested Citation

Lopez, Edward J. and Molina, David J., Third-Degree Price Discrimination: Apology Not Necessary (June 4, 2010). Atlantic Economic Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1620703

Edward J. Lopez (Contact Author)

Western Carolina University ( email )

College of Business
Forsyth 224C
Cullowhee, NC 28723
United States

HOME PAGE: http://www.edwardjlopez.com

David J. Molina

University of North Texas ( email )

1155 Union Circle #305340
Denton, TX 76203
United States

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