Monopoly price discrimination with constant elasticity demand

Abstract

This paper presents new results on the welfare e¤ects of thirddegree price discrimination under constant elasticity demand. We show that when both the share of the strong market under uniform pricing and the elasticity di¤erence between markets are high enough, then price discrimination not only can increase social welfare but also consumer surplus. (JEL D42, L12, L13)

Direct Welfare Analysis of Relative Price Regulation*

“…Therefore W 0 ≥ W * with constant elasticities if elasticities do not differ too much, confirming Proposition 6(ii) of ACV. For this it clearly suffices that elasticities differ by no more than 1, but Aguirre and Cowan [2015] show that discrimination can be good for welfare with constant elasticities of 1.5 and 3 in the two-market case -a difference of 1.5.…”

“…6 However, if constant elasticities differ enough, consumer surplus may be greater with discrimination than with uniform pricing. Thus, for example, Aguirre and Cowan [2015] show that with two markets and elasticities of 4 and 11 -a ratio of 2.75 -consumer surplus is higher with discrimination if the more elastic market is relatively small.…”

Welfare Effects of Third-Degree Price Discrimination: Ippolito Meets Schmalensee and Varian

“…The constant elasticity demand family is very appropriate for illustrating the tradeoff between the two effects given that as total output increases with discrimination (see, Ippolito, 1980, Aguirre, 2006, and Aguirre, Cowan and Vickers, 2010 output effect is positive. If both the share of the strong market under uniform pricing and the elasticity difference between markets are big enough then the output effect dominates to the misallocation effect (see, Aguirre, 2011). iv.…”

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, , 2008Cowan, 2007Cowan, , 2016and Aguirre et al, 2010). Aguirre et al (2010) is particularly relevant.…”