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Third-Degree Price Discrimination and Output: Generalizing a Welfare Result

01 Jan 2016-The American Economic Review (American Economic Association)-Vol. 80, Iss: 5, pp 1259-1262
About: This article is published in The American Economic Review.The article was published on 2016-01-01 and is currently open access. It has received 179 citations till now. The article focuses on the topics: Price discrimination.
Citations
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Book ChapterDOI
Lars Stole1
TL;DR: In this article, the developments in price discrimination theory as it applies to imperfectly competitive markets are surveyed in the areas of first-, second-and third-degree price discrimination, pricing under demand uncertainty, bundling and behavior-based discrimination.
Abstract: This chapter surveys the developments in price discrimination theory as it applies to imperfectly competitive markets. Broad themes and conclusions are discussed in the areas of first-, second- and third-degree price discrimination, pricing under demand uncertainty, bundling and behavior-based discrimination.

397 citations


Cites background from "Third-Degree Price Discrimination a..."

  • ...Schwartz (1990) considers cases in which marginal costs are decreasing....

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Journal ArticleDOI
TL;DR: This paper showed that uniform pricing by a monopolist yields lower global welfare than third-degree discrimination if demand dispersion across markets is large, and that mixed systems, permitting discrimination across but not within designated groups of markets, yield significantly higher welfare than uniform pricing.

275 citations


Additional excerpts

  • ...Because all markets in group i are charged a uniform price under the mixed system, misallocation of output among these markets is avoided; thus, the welfare to group i is strictly higher than under discrimination [Schwartz (1990)]....

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  • ...Schwartz I J. Int. Econ. 37 (1994) 167-19....

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  • ...I’ This welfare result holds for any marginal cost function [see Schwartz (1990)]....

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Journal ArticleDOI
TL;DR: In this paper, a general analysis of the effect of monopolistic third degree price discrimination on welfare and output is presented for all markets in a single market under certain conditions, in which the curvatures of the direct and inverse demand functions in the dierent mar- kets are compared.
Abstract: This paper presents a general analysis of the eects of monopolistic third- degree price discrimination on welfare and output when all markets are served Su¢ cient conditions -involving straightforward comparisons of the curvatures of the direct and inverse demand functions in the dierent mar- kets -are presented for discrimination to have negative or positive eects on

226 citations


Cites background from "Third-Degree Price Discrimination a..."

  • ...Hal R. Varian (1985) proved very generally that a necessary condition for welfare to rise with discrimination is that total output increases (see also Marius Schwartz 1990)....

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Journal ArticleDOI
TL;DR: In this article, the authors investigated the effect of price discrimination on the change in social welfare and total output in a final good market, where the buyers of the input are downstream producers of the final good, and showed that an increase in the total output is a sufficient condition for welfare deterioration.
Abstract: If price discrimination is realized, the economy shifts from one equilibrium to another. It clearly involves welfare effects: The price-discriminator clearly gains, some consumers may also gain from the price cut, but others may lose faced with higher prices, etc. Traditionally the change in social welfare is known to be closely related to the change in total output. In the case of third-degree price discrimination, it is well known that an increase in total output is a necessary condition for welfare improvement. Richard Schmalensee (1981) proves this fact in a model in which the monopolist with constant marginal cost can perfectly separate markets. Further, Hal R. Varian (1985) extends this result to the case of interdependent markets, permnitting increasing marginal cost of the monopolist. And finally, the assumption of nondecreasing marginal cost is eliminated by Marius Schwartz (1990). Roughly speaking, this proposition says that if there is a welfare gain from price discrimination, there has to be some gain to offset the distortion involved. On the other hand, the vast majority of legal and other policy disputes over the price discrimination concern input markets, not final good markets. Thus, it seems important to investigate the situation in which a discriminating monopolist is not a final good supplier but an input supplier, and the buyers of the input are downstream producers of a final good, as is assumed in this paper. If the downstream firms have different technologies, their input demand functions will be different, and thus the monopolist has an incentive to price-discriminate. In this scenario, Michael L. Katz (1987) and Patrick DeGraba (1990) study the effect of inputmarket price discrimination, and show that price discrimination always lowers welfare because it involves the distortion that a lower-cost downstream firm is assigned a higher price. Unfortunately, in their simple settings on the technology of downstream industry, price discrimination can never change total output (of the input or of the final good).1 Thus we must say that welfare effect of input-market price discrimination remains open to question if it has some effect on total output. In particular, we are curious as to whether we can obtain some close relationship between the changes in welfare and total output as we have obtained in the final good market settings. With this motivation, we will construct a model which involves change in total output (of the final good). In the next section, the model and assumptions are provided. In Section II, after we extend the result of Katz (1987) and DeGraba (1990), we find a relationship between the changes in welfare and total output. Strikingly, it states that an increase in the total output of the final good is a sufficient condition for welfare deterioration. This result contrasts with that obtained by Schmalensee (1981), Varian (1985), and Schwartz (1990) from usual models of price discrimination in a final good market. Section III concludes the analysis.

180 citations

01 Jan 2003

129 citations


Cites background from "Third-Degree Price Discrimination a..."

  • ...Schwartz (1990) extends Varian’s boundary results to cases in which marginal costs are decreasing....

    [...]

References
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Book
01 Jan 1920
TL;DR: Aslanbeigui et al. as mentioned in this paper discussed the relationship between the national dividend and economic and total welfare, and the size of the dividend to the allocation of resources in the economy and the institutional structure governing labor market operations.
Abstract: The Economics of Welfare occupies a privileged position in economics. It contributed to the professionalization of economics, a goal aggressively and effectively pursued by Pigou's predecessor and teacher Alfred Marshall. The Economics of Welfare also may be credited with establishing welfare economics, by systematically analyzing market departures and their potential remedies. In writing The Economics of Welfare, Pigou built a bridge between the old and the new economics at Cambridge and in Britain. Much of the book remains relevant for contemporary economics. The list of his analyses that continues to play an important role in economics is impressive. Some of the more important include: public goods and externalities, welfare criteria, index number problems, price discrimination, the theory of the firm, the structure of relief programs for the poor, and public finance. Pigou's discussion of the institutional structure governing labor-market operations in his Wealth and Welfare prompted Schumpeter to call the work "the greatest venture in labor economics ever undertaken by a man who was primarily a theorist." The Economics of Welfare established welfare economics as a field of study. The first part analyzes the relationship between the national dividend and economic and total welfare. Parts II and III link the size of the dividend to the allocation of resources in the economy and the institutional structure governing labor-market operations. Part IV explores the relationship between the national dividend and its distribution. In her new introduction, Nahid Aslanbeigui discusses the life of Pigou and the history of The Economics of Welfare. She also discusses Pigou's theories as expressed in this volume and some of the criticisms those theories have met as well as the impact of those criticisms. The Economics of Welfare is a classic that repays careful study.

5,145 citations

Posted Content
TL;DR: In this article, the effect of price discrimination on social welfare using methods from duality theory was studied using Ebsco's reservation model, and upper and lower bounds on welfare change with optimal price discrimination.
Abstract: Studies the effect of price discrimination on social welfare using methods from duality theory. Features of the reservation model presented; Quasi-linear utility and consumers' surplus; Upper and lower bounds on welfare change; Bounds on welfare change with optimal price discrimination. (From Ebsco)

605 citations

Posted Content
TL;DR: In this article, the authors focus on the output and welfare implications of monopolistic third-degree price discrimination, and propose a solution to maximize profits by charging different prices to different markets or classes for customers; Maldistribution of resources for different uses.
Abstract: Focuses on output and welfare implications of monopolistic third-degree price discrimination Maximization of profits by charging different prices to different markets or classes for customers; Maldistribution of resources for different uses (From Ebsco)

511 citations