Price Discrimination in Asymmetric Industries: Implications for Competition and Welfare
18 Pages Posted: 4 Sep 2014
Date Written: June 26, 2014
Price discrimination by consumer's purchase history is widely used in regulated industries, such as communication or utilities, both by incumbents and entrants. I show that such discrimination can have surprisingly negative welfare effects -- even though prices and industry profits fall, so does consumer surplus. Earlier studies that did not allow entrants to discriminate or assumed symmetric firms yielded sharply different results, the pro-competitive effect of price discrimination are stronger in these settings. Imposing a pricing constraint on incumbent's discrimination leads the entrant to discriminate more heavily, but still improves both consumer and producer welfare.
Keywords: History-based price discrimination, asymmetric price discrimination, switching cost
JEL Classification: L13, L41
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