Welfare-increasing third-degree price discrimination

Jan 2016

The RAND Journal of Economics, 47, Issue 2, p. 326–340

DOI: https://doi.org/10.1111/1756-2171.12128

Simon Cowan

When demand functions in different markets are derived from distributions of reservation prices that differ only in their means, conditions exist such that third-degree price discrimination leads to greater total output and greater total welfare. Welfare is higher with discrimination than with a uniform price when demand functions are derived from logistic distributions with different means. Both welfare and consumer surplus are higher with discrimination for demands derived from a distribution related to the Pareto. In general, whether discrimination increases total output depends on demand being more convex in markets in which prices fall with discrimination than in those in which prices rise. (JEL D42, L12, L13)

Department Author

Simon Cowan

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