Welfare-increasing third-degree price discrimination

Apr 2013 | 652

Authors: Simon GB Cowan

The welfare and output effects of monopoly third-degree price discrimination are analyzed when inverse demand functions are parallel.  Welfare is higher with discrimination than with a uniform price when demand functions are derived from the logistic distribution, and from a more general class of distributions.  The sufficient condition in Varian (1985) for a welfare increase holds for these demand functions.  Total output is higher with discrimination for a large set of demand functions including those derived from strictly log-concave distributions with increasing cost pass-through, such as the normal, logistic and extreme value, and standard log-convex demands.

JEL Codes: D42, L12, L13

Keywords: Third-degree price discrimination, monopoly, social welfare, output

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