Market Foreclosure and the Welfare Impacts of Price Discrimination

Abstract

There is an extensive literature studying the welfare comparison of third-degree price discrimination vs. uniform pricing, typically under the assumption that all markets are served under uniform pricing. In this study, we allow market foreclosure and show that the welfare comparison of price discrimination vs. uniform pricing depends on whether market foreclosure is allowed. We also analyze how firms' foreclosure incentives vary with competition intensity. Our results show that an increase in competition intensity makes complete foreclosure less likely to be an equilibrium. On the other hand, the impact of competition intensity on partial foreclosure is non-monotonic. We also show that equilibrium under uniform pricing may feature strategic market foreclosure, defined as committing not to serve a market when demand there is positive.

Keywords: Price discrimination; Market foreclosure; Strategic market foreclosure

JEL Classification: D40, L13, L40