Price Discrimination and Investment Incentives

Abstract

We examine a model of suppliers selling to two segments of consumers, who have different preferences for quality (or some product characteristic). We show that if the firm is unable to price discriminate between the segments, then there is less investment in quality. We find that both consumer segments, and the society overall, may suffer if the firms are unable to price discriminate. We extend the model to duopoly competition, and find that our results still hold.

Keywords: price discrimination, investment, parallel trade, pharmaceuticals, net neutrality

JEL Classification: F13, L42, L13, D92