How (Not) to Price Discriminate

27 Pages Posted: 13 Jan 2012 Last revised: 21 Nov 2022

See all articles by Qihong Liu

Qihong Liu

University of Oklahoma - Department of Economics

Jie Shuai

Zhongnan University of Economics and Law

Date Written: November 15, 2022

Abstract

The advance of digital economy has greatly improved firms' ability to price discriminate across consumers, with far-reaching yet ambiguous effects on profitability and welfare. This has caught the attention of academician, government authorities, and business practitioners. We investigate the welfare impacts of price discrimination using a two-dimensional product differentiation model with best-response asymmetry. Among our findings: (i) Price discrimination has a reduced demand elasticity effect in two-dimensional models but not in one-dimensional models. (ii) Price discrimination on one and the same dimension can raise profits and uniform price lies in between the discriminatory prices. These results are similar to those in one-dimensional models of price discrimination but with best-response symmetry. (iii) Price discrimination on one but different dimensions and price discrimination on both dimensions are likely to lower profits, mimicking the standard results in one-dimensional models with best-response asymmetry. Overall our results suggest that regulators need to be more cautious with the practice of oligopolistic price discrimination under best-response asymmetry.

Keywords: Price discrimination, Best-response asymmetry, Multi-dimensional product differentiation

JEL Classification: D43, L13, L40

Suggested Citation

Liu, Qihong and Shuai, Jie, How (Not) to Price Discriminate (November 15, 2022). Available at SSRN: https://ssrn.com/abstract=1984000 or http://dx.doi.org/10.2139/ssrn.1984000

Qihong Liu (Contact Author)

University of Oklahoma - Department of Economics ( email )

Norman, OK 73019-2103
United States
405-325-5846 (Phone)

HOME PAGE: http://qliu.oucreate.com

Jie Shuai

Zhongnan University of Economics and Law ( email )

182 Nanhu Ave.
East Lake High-tech Development Zone
Wuhan, Hubei 430073
China

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