How (Not) to Price Discriminate

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