Differential pricing when costs differ: a welfare analysis

Abstract

This article analyzes the welfare effects of monopoly differential pricing in the important, but largely neglected, case where costs of service differ across consumer groups. Cost‐based differential pricing is shown to increase total welfare and consumer welfare relative to uniform pricing for broad classes of demand functions, even when total output falls or the output allocation between consumers worsens. We discuss why cost‐based differential pricing tends to be more beneficial for consumers than its demand‐based counterpart, third‐degree price discrimination. We also provide sufficient conditions for welfare‐improving differential pricing when costs and demands differ across consumer groups.

Vertical Bargaining and Retail Competition: What Drives Countervailing Power?

“…34 Chen and Schwartz (2015) also found the derivative of the pass-through rate to be of particular importance, albeit in a quite different context: that of welfare effects of third-degree price discrimination when costs differ between consumer groups. 35 For instance, when firms sell homogeneous products, a change in consumer surplus with respect to quantity is given by ÀQP Q and a change in welfare by P À c.…”

“… Chen and Schwartz () also found the derivative of the pass‐through rate to be of particular importance, albeit in a quite different context: that of welfare effects of third‐degree price discrimination when costs differ between consumer groups. …”

Should platforms be allowed to charge ad valorem fees?

“…Finally, our paper also contributes to the extensive literature on the welfare effects of monopolistic third-degree price discrimination (e.g., Schmalensee [1981]; Varian [1985]; Schwartz [1990]; Layson [1994]; Aguirre [2006Aguirre [ , 2008; Cowan [2007Cowan [ , 2016; Aguirre et al [2010]; and Chen and Schwartz [2015]). Aguirre et al [2010] is particularly relevant.…”

Pharmaceutical innovation and parallel trade

“…3 Some studies argue that parallel trade, where it is permitted, has not yielded the expected results in terms of convergence in price. 4 Although policy papers have been written, starting with Malueg and Schwartz (1994), less attention has been paid on the long-run economic implications of parallel trade on IPRs. Scholars who believe that such arbitrage could erode IPRs, weakening the incentive for investment (e.g., Chard…”

“…This is also controversial, as preventing parallel trade by means of private contracts could be considered an anticompetitive behavior that prevails under competition law (Gallini and Hollis, 1999). 4 Parallel trade does not imply necessarily price convergence if consumers do not believe that the original drug and the parallel imported drug have the same value (Jelovac and Bordoy, 2005). Empirical studies in the EU include Ganslandt and Maskus (2004), Kanavos and Costa-Font (2005) and Kyle (2007).…”