Price Discrimination and Market Power
18 Pages Posted: 23 Sep 2004
Date Written: June 7, 2004
If there is price discrimination, at least one of the prices is not equal to marginal cost. Therefore, if there is price discrimination, there must be market power. While this logic is sound, it has led many policy-makers to believe that price discrimination and market power are positively correlated. We present a model where measured price discrimination can be low while market power is high, and price discrimination can be high while market power is low, thus demonstrating that there is no theoretical connection between the strength of price discrimination and that of market power. We then present strong evidence that price discrimination is negatively correlated with market power in the US airlines industry.
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