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Perfect Price Discrimination with Costless Arbitrage

Melbourne Business School Working Paper No. 2005-15

21 Pages Posted: 20 Jun 2005  

Joshua S. Gans

University of Toronto - Rotman School of Management; NBER

Stephen P. King

Monash University - Department of Economics; Productivity Commission

Date Written: June 2005

Abstract

The ability of a monopoly seller to prevent resale is often presented as a necessary condition for first degree and third degree price discrimination. In this paper, we explore this claim and show that, even with costless arbitrage markets, price discrimination may continue to be both feasible and profit maximising despite potential resale. With finite numbers of consumers, arbitrage markets may be 'thin', in the sense that there can be too few low-valuation consumers to supply high-valuation consumers. We examine both ex ante and ex post arbitrage markets and show how a monopoly can exploit potential 'thinness' to profitably price discriminate. In each case, we present sufficient conditions for equilibrium price discrimination. We note that the form of such discrimination depends on the nature of the arbitrage market and consider business strategies that a monopoly might adopt to exacerbate market thinness. Our results show how market depth and the effectiveness of arbitrage are the key elements for price discrimination, rather than the per se prevention of reselling.

Keywords: price discrimination, arbitrage, personalised pricing, group pricing

JEL Classification: D42, L11

Suggested Citation

Gans, Joshua S. and King, Stephen P., Perfect Price Discrimination with Costless Arbitrage (June 2005). Melbourne Business School Working Paper No. 2005-15. Available at SSRN: https://ssrn.com/abstract=746244 or http://dx.doi.org/10.2139/ssrn.746244

Joshua S. Gans (Contact Author)

University of Toronto - Rotman School of Management ( email )

Canada

HOME PAGE: http://www.joshuagans.com

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stephen Peter King

Monash University - Department of Economics ( email )

Wellington Road
Victoria, Roodepoort 3145
Australia

Productivity Commission ( email )

Level 28
35 Collins St.
Melbourne, Victoria, Victoria 3000
Australia

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