Quality differences, third-degree price discrimination, and welfare
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WPnull/15 Quality differences, third-degree price discrimination, and welfare
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Abstract
We propose a theoretical model to analyze the welfare implications of price discrimination
in the presence of differences in quality. The model considers two markets where in each
market competition takes place between a local firm that operates in that market only and
a global firm that operates in both markets. All firms are assumed to be producing with
zero marginal costs. Local firms produce a good that is perceived by consumers to have
superior quality than that produced by the global firm. We find that there are parameter
values such that welfare increases while total output decreases if the global firm engages
in price discrimination. This is due to a positive allocation effect brought about precisely by
the global firm engaging in price discrimination.
Classification JEL:D43, D60
Keywords:Vertical diff erentiation, third-degree price discrimination, welfare
Number of Pages:41
Creation Date:2015-10-27
Number:null/15
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