Can Price Discrimination Be Bad for Firms and Good for All Consumers? A Theoretical Analysis of Cross-Market Price Constraints with Entry and Product Differentiation
Topics in Economic Analysis & Policy, Vol. 3, No. 1, Article 12
Posted: 23 Oct 2003
The article examines a differentiated-products duopoly model where the firms make entry decisions to two markets and then choose prices. The effects of product differentiation and entry costs are analyzed in two games: with and without price discrimination between the markets. Allowing price discrimination encourages more entry and tends to reduce prices and profits and to increase consumer welfare in both markets. The model suggests that firms might be better off if they agree not to price discriminate between different markets. It also suggests that when the market is not a natural monopoly, regulators should consider the effects of universal service requirements on entry before adopting them, because entry might be discouraged by such requirements, leading to less competitive markets.
Keywords: Cross-Market Price Constraints, Price Discrimination, Regulation, Product Differentiation, Entry, Duopoly, Universal Service Requirements
JEL Classification: L13, D43, L50, L11
Suggested Citation: Suggested Citation