Third-Degree Price Discrimination: Apology Not Necessary
Atlantic Economic Journal, Forthcoming
22 Pages Posted: 3 Aug 2010
Date Written: June 4, 2010
Applied work in price discrimination often treats demand curves among multiple market segments as algebraically additive. Yet the welfare effects of multi-market (third degree) price discrimination depend on the method by which demand segments are added. Treating demands as geometrically additive yields the well known result that discrimination absent an increase in production diminishes Marshallian surplus. But if demands are treated as algebraically additive then discrimination increases welfare relative to uniform pricing. Quantity is identical in the three cases, so the effect is not due to market opening. Nor is the effect due to scale economies since marginal cost is assumed constant. Profit is always greater under discrimination, so the effect is due to distributional changes in consumer surplus. The model is restricted to linear demands and constant marginal cost but can be generalized for future work and policy analysis.
Keywords: price discrimination, third-degree, consumer surplus, monopoly regulation
JEL Classification: D21, L12, L59
Suggested Citation: Suggested Citation