Third-degree price discrimination, quality choice, and welfare

Ikeda, Tomoya; Toshimitsu, Tsuyoshi

doi:10.1016/j.econlet.2009.09.024

Cited by 23 publications

(15 citation statements)

References 5 publications

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“…In contrast to these studies, Adachi (2002, 2005) shows that, when there are consumption externalities, price discrimination can increase social welfare even if aggregate output remains the same (see also Ikeda and Nariu 2009 and Okada and Adachi 2013). Ikeda and Toshimitsu (2010) show that if quality is endogenously chosen, price discrimination necessarily improves social welfare.…”

mentioning

confidence: 89%

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

Adachi

Matsushima

2014

Economic Inquiry

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract This paper studies the relationship between horizontal product di¤erentiation and the welfare e¤ects of third-degree price discrimination in oligopoly. By deriving linear demand from a representative consumer's utility and focusing on the symmetric equilibrium of a pricing game, we characterize the conditions relating to such demand properties as substitutability and complementarity for price discrimination to improve social welfare. In particular, we show that price discrimination can improve social welfare if …rms' brands are substitutes in a market where the discriminatory price is higher and complements in one where it is lower, but welfare never improves in the reverse situation. We verify, however, that consumer surplus is never improved by price discrimination; welfare improvement by price discrimination is solely due to an increase in the …rms'pro…ts. This means that there is no chance that …rms su¤er from a "prisoners'dilemma," that is, …rms are better o¤ by switching from uniform pricing to price discrimination. Terms of use: Documents in

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confidence: 89%

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

Adachi

Matsushima

2014

Economic Inquiry

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“…We also allow for asymmetry in the quality of each firm's offerings, which we will specify shortly when we discuss consumer reservation utilities. As in Liu and Serfes (2005), we assume the cost of developing a certain quality to be a fixed cost (i.e., the cost of developing a product or building a brand name), which has no effect on the marginal cost of production (see also Motta 1993, Ikeda andToshimitsu 2010). 9 Each firm offers a base good with marginal cost c b .…”

Section: Firmsmentioning

confidence: 99%

Add-on Pricing by Asymmetric Firms

Shulman

Geng

2013

Management Science

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T his paper uses an analytical model to examine the consequences of add-on pricing when firms are both horizontally and vertically differentiated and there is a segment of boundedly rational consumers who are unaware of the add-on fees at the time of initial purchase. We find that consumers who know the add-on fees can be penalized-and increasingly so-by the existence of boundedly rational consumers. Our consideration of quality asymmetries on base goods and add-ons, plus the inclusion of boundedly rational consumers, leads to several novel findings regarding firm profits. When quality asymmetry is on base goods only and with boundedly rational consumers, add-on pricing can diminish profit for a qualitatively superior firm and increase profit for an inferior firm (i.e., a lose-win result), compared to when add-on pricing is prohibited or infeasible. When quality asymmetries exist on both base goods and add-ons and without boundedly rational consumers, the opposite win-lose result prevails. When quality asymmetries exist on both base goods and add-ons and with boundedly rational consumers, the result can be win-win, win-lose, or lose-win, depending on the magnitude of quality differentiation on add-ons.

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“…The effect on welfare depends on the degree of product substitutability and entry costs. Nguyen (2014) uses instead a model with variable quality costs to find that monopolistic third-degree price discrimination is always welfare-reducing, regardless of whether quality levels are endogenous or exogenously given, a result that contrasts with that in Ikeda and Toshimitsu (2010). In a vertical differentiation setting, Ikeda and Toshimitsu (2010) show that if a monopolist is facing linear demands and simultaneously choosing product quality and price, price discrimination brings about a quality effect that always dominates the misallocation effect-output effects are absent in this model.…”

Section: Introductionmentioning

confidence: 99%

Quality Differences, Third‐degree Price Discrimination, and Welfare

2016

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We propose a model with two markets to analyze the welfare implications of price discrimination with quality differences. In each market a local firm that operates in that market only competes against a global firm that operates in both markets. Local firms produce higher-quality goods than the global firm. If the quality levels of the local firms' products are the same, price discrimination is never welfare-decreasing. If they differ, discrimination is welfare-increasing if quantity increases. Because of a positive allocation effect of price discrimination, there are parameter values such that welfare increases while total output decreases with price discrimination. (JEL D43, D60) 339

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Third-degree price discrimination, quality choice, and welfare

Cited by 23 publications

References 5 publications

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

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

Add-on Pricing by Asymmetric Firms

Quality Differences, Third‐degree Price Discrimination, and Welfare

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