The Welfare Effects of Third-Degree Price Discrimination in a Differentiated Oligopoly

33 Pages Posted: 18 Jan 2011

See all articles by Takanori Adachi

Takanori Adachi

Kyoto University - Graduate School of Management; Kyoto University - Graduate School of Economics

Noriaki Matsushima

Osaka University - Institute of Social and Economic Research (ISER)

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Date Written: January 17, 2011

Abstract

This paper studies the relationship between horizontal product differentiation and the welfare effects of third-degree price discrimination in oligopoly. By deriving linear demand from a representative consumer's utility and focusing on the symmetric equilibrium of a pricing game, we characterize the conditions relating to such demand properties as substitutability and complementarity for price discrimination to improve social welfare. In particular, we show that price discrimination can improve social welfare if firms' brands are substitutes in a market where the discriminatory price is higher and complements in one where it is lower, but welfare never improves in the reverse situation. We verify, however, that consumer surplus is never improved by price discrimination; welfare improvement by price discrimination is solely due to an increase in the firms' profits. This means that there is no chance that firms suffer from a "prisoners' dilemma," that is, firms are better off by switching from uniform pricing to price discrimination.

Keywords: Third-Degree Price Discrimination, Oligopoly, Social Welfare, Horizontal Product Differentiation, Substitutability, Complementarity

JEL Classification: D43, D60, L11, L13

Suggested Citation

Adachi, Takanori and Matsushima, Noriaki, The Welfare Effects of Third-Degree Price Discrimination in a Differentiated Oligopoly (January 17, 2011). ISER Discussion Paper No. 800, Available at SSRN: https://ssrn.com/abstract=1742664 or http://dx.doi.org/10.2139/ssrn.1742664

Takanori Adachi

Kyoto University - Graduate School of Management ( email )

36-1 Yoshida-honmachi
Sakyo-ku
Kyoto, 606-8501
Japan

Kyoto University - Graduate School of Economics ( email )

36-1 Yoshida-honmachi
Sakyo-ku
Kyoto, 606-8501
Japan

Noriaki Matsushima (Contact Author)

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan

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