Oligopoly price discrimination, competitive pressure and total output

Iñaki Aguirre
2019 Economics : the Open-Access, Open-Assessment e-Journal  
This paper extends the traditional analysis of the output effect under monopoly (thirddegree) price discrimination to a multimarket oligopoly. The author shows that under oligopoly price discrimination, differences in competitive pressure, measured by the number of firms, across markets are more important than the relative demand curvature when determining the effect on total output. JEL D42 L12 L13 2 With respect to uniform pricing, third-degree price discrimination generates two effects:
more » ... s two effects: first, price discrimination causes a misallocation of goods from high to low value users and, second, price discrimination affects total output. 1 Therefore, a necessary condition for third-degree price discrimination to increase social welfare is an increase in total output. 2 As a result, a focal point has been the analysis of the effects of price discrimination on output. 3 It is known from Pigou (1920) that under linear demands price discrimination does not change output. In the general non-linear case, however, the effect of price discrimination on output may be either positive or negative. It is also well known (see, for example, Robinson, 1933 , or Schmalensee, 1981 ) that when all the strong markets (markets where the optimal discriminatory price exceeds the optimal single price) have concave demands and the weak markets (where the optimal discriminatory prices are lower than the single price) have convex demands (with at least one market with strict concavity or convexity), then third-degree price discrimination increases output. When strong markets have convex demands and weak markets concave demands price discrimination reduces output. In the case in which all the demand curves have similar curvature the answer is more complicated. Shih et al. (1988) and Cheung and Wang (1994) obtain more general results and Aguirre (2009) , Aguirre et al. (2010) and Cowan (2016) show that the effect of third-degree price discrimination on total output is intrinsically related to the shape of demands and inverse demands in strong markets as compared to the shape of direct and inverse demands in weak markets. Over the last few decades much research has analyzed price discrimination in oligopolistic markets both under price competition and quantity competition. 4 Here we mainly focus on price discrimination under quantity competition following Stole's (2007) insight: "Perhaps the simplest model of imperfect competition and price discrimination is the immediate extension of Cournot's quantity-setting, homogeneous-good game to firms competing in distinct market segments." 5 The Cournot model has been widely used to analyze price discrimination in many different contexts. 6 This paper extends the traditional analysis of the output effect under _________________________ 1 See, for example, Schmalensee (1981) and Aguirre et al. (2010) for an explicit decomposition of the change in social welfare into these two effects: the misallocation effect and the output effect. 2 See Schmalensee (1981), Varian (1985) and Schwartz (1990) . 3 It is assumed throughout the paper that all markets are served under both pricing policies, uniform pricing and price discrimination. The possibility that price discrimination opens up new markets (and that may even yield to Pareto improvements) has been analyzed for instance by Hausman and Mackie-Mason (1988) . 4 Many papers have analyzed oligopolistic price discrimination under price competition
doi:10.5018/economics-ejournal.ja.2019-52 fatcat:qgkavazmk5gazhr36qt6swlm6a