The Welfare Effects of Third‐degree Price Discrimination in a Differentiated Oligopoly

Abstract

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National pricing with local quality competition

“…This result has some parallels toThisse and Vives (1988) who find that price discrimination is the unique equilibrium in a setting of spatially continuous demand, where two competing firms choose between uniform and location-specific prices.5 In some of our numerical examples with "strong" quality competition, the profit gain from national pricing will in many cases exceed 5% (while holding fixed the rival's choice of pricing strategy, local or national), and can also become much larger than that, exceeding 20%, when only one chain adopts national pricing.6 According to the standard terminology in the third-degree price discrimination literature, as first introduced byRobinson (1933), the profit-maximizing price is higher (lower) in the stronger (weaker) market.7 Armstrong and Vickers (2001) apply a similar model and show that oligopolistic firms benefit from price discrimination if the degree of competition is sufficiently strong.8 Our result that consumers in all markets might benefit from uniform pricing is in stark contrast to the result derived byAdachi and Matsushima (2014), who study the welfare effects of third-degree price discrimination in oligopolistic markets with horizontal product differentiation and symmetric demand in each market. They find that uniform pricing leads to consumer losses in weak markets that are always higher than the corresponding consumer gains in strong markets, causing an overall reduction in consumers' surplus.9 In the literature on third-degree price discrimination there are some papers that incorporate a quality dimension, but typically either in a monopoly framework (e.g.,Ikeda & Toshimitsu, 2010) or with exogenous quality differences between firms (e.g.,Galera et al, 2017).…”

On the effects of antitrust policy intervention in pricing strategies in a distribution channel

“…In a cost‐symmetric duopoly (where the demand across markets is independent and symmetric), Dastidar (2006) shows that the effects of discrimination on quantities and profits are not the same under monopoly and duopoly settings, yet the welfare effects are very similar. Adachi and Matsushima (2014) consider a duopoly with horizontal product differentiation, finding that discrimination can enhance welfare only if symmetric retailers' products are substitutes (resp. complements) in the strong (resp.…”

Oligopoly price discrimination, competitive pressure and total output

“…4 Many papers have analyzed oligopolistic price discrimination under price competition, including Holmes (1989), Corts (1998), Dastidar (2006), Adachi and Matsushima (2014), Adachi and Fabinger (2019) and Chen et al (2019).…”