airline market power and intertemporal price dispersion this paper analyzes the empirical relationship between market structure and price dispersion in the airline markets connecting the u k and the republic of ireland price dispersion is measured by the gini coefficient calculated using fares posted on the internet at specific days before takeoff we control for passengers heterogeneity in their purpose of travel as well as for such peak periods as christmas and easter our finding of a negative correlation between competition and price dispersion suggests that competition is likely to hinder the airlines ability to price discriminate although this effect appears to be lessened in peak periods

colluding on relative prices firms sometimes agree to limit the discounts they offer a class of customers i e they collude on the price differences across consumer classes why courts have struck down agreements to limit discounts as violations of the laws against price fixing are these collusive agreements in fact efficient this article addresses these questions in a multiproduct duopoly model under one interpretation the incentive to collude on relative prices can be traced to heterogeneity in consumers time costs under fairly general conditions total surplus increases with the collusion this efficiency effect is most striking in the case where collusion raises the prices faced by all consumers over which firms compete

why do manufacturers issue coupons an empirical analysis of breakfast cereals we explore the relationship between shelf prices and manufacturers coupons for 25 readyto eat breakfast cereals we find that shelf prices are lower during periods when coupons are available this result is inconsistent with static monopoly price discrimination under a broad range of assumptions we present evidence that is inconsistent with both dynamic theories of price discrimination and explanations of couponing based on the vertical relationship between manufacturers and retailers we find support for models of price discrimination in oligopoly settings as well as suggestions that firmwide incentives may induce managers to use coupons and price cuts simultaneously finally lagged coupons have a positive effect on current sales suggesting that coupons are used to induce repurchase

does competition reduce price dispersion new evidence from the airline industry we analyze the effects of competition on price dispersion in the airline industry using panel data from 1993 q1 through 2006 q3 competition has a negative effect on price dispersion in line with the textbook treatment of price discrimination this effect is pronounced for routes with consumers characterized by relatively heterogeneous elasticities of demand on routes with a homogeneous customer base the effects of competition on price dispersion are smaller our results contrast with those of borenstein and rose who found that price dispersion increases with competition we reconcile the different results by showing that the cross sectional estimator suffers from omitted variable bias

price discrimination and retail configuration the hypothesis that price discrimination based on willingness to pay for quality can occur in multifirm markets is confirmed using microdata on gasoline retailing a test that discriminates between price structures associated with discrimination and with cost driven competitive differentials is developed and implemented with controls for variation in outlet and market characteristics a second test based on profitability variation rejects a competitive peak load pricing explanation for the observed price dispersion the data suggest that price discrimination at the retail level adds at least 9 a gallon to the average price of full service gasoline

the dynamics pattern of price dispersion in retail fuel markets abstract this paper empirically investigates the dynamics of price dispersion in retail fuel markets as a response to the corresponding wholesale price changes for this purpose we take advantage of a daily dataset of prices fixed by gas stations in two spanish regions it is consistently found that retail price dispersion is temporarily enlarged as a consequence of wholesale price increases while it is reduced due to decreases the presence of asymmetries in the short run dynamics is also revealed the impact of positive changes in the wholesale price is in the first days of adjustment clearly greater the dynamics pattern could be explained at least in part by the faster response of prices in the stations associated with the two vertically integrated companies that have the largest market share i e repsol and cepsa

antidumping protection and r d competition in recent years antidumping protection has spread throughout the world evidence shows that antidumping often targets r d intensive sectors raising a con cern that it may adversely affect worldwide investments in r d we investigate this issue in a model of reciprocal dumping extended to a two stage game in which two firms first choose r d levels and then compete in prices we find that when a single government institutes antidumping law the protected firm decreases investment in r d while the constrained firm invests more when both governments engage in antidumping actions both firms invest more in r d than under free trade jel classification f12 f13

on two part tariff competition in a homogeneous product duopoly abstract we explore aspects of two part tariff competition between duopolists providing a homogeneous service when consumers differ with respect to their usage levels competition in only one price component the fee or the rate may allow both firms to enjoy positive profits if the other price component has been set at levels different enough between firms fixing one price component alters the nature of competition indirectly introducing an element of product differentiation endogenous market segmentation emerges with the heavier users choosing the lower rate firm and the lighter users choosing the lower fee firm when no price component can be negative competition becomes softer profits tend to be higher but there is also a disadvantage for the firm that starts with a higher fee than that of its rival

price discrimination in free entry markets using a spatial model of monopolistic competition we investigate price discrimination in free entry zero profit markets we show that when brands are heterogeneous competition does not prevent discrimination the power to earn economic profits is not necessary for a firm to maintain discriminatory prices our model treats formally the fact that consumers difer not only in the utility they derive from a good but also in how strongly they prefer one brand over all others in markets where firms are very competitive sorting consumers on the strength on brand preference produces larger price differentials between groups than sorting on the basis of consumers reservation prices for the good when firms sort customers on the basis of strength of brand preference however we find that the output and welfare effects are generally less favorable than when sorting is more closely related to consumers reservation prices

competitive price discrimination we model firms as supplying utility directly to consumers the equilibrium outcome of competition in utility space depends on the relationship u between profit and average utility per consumer public policy constraints on the deals firms may offer affect equilibrium outcomes via their effect on u f rom this perspective we examine the profit utility and welfare implications of price discrimination policies in an oligopolistic framework we also show that an equilibrium outcome of competitive nonlinear pricing when consumers have private information about their tastes is for firms to offer efficient two part tariffs

market power and collusion in the ocean shipping industry is a bigger cartel a better cartel i introduction the ocean shipping industry enjoys certain conditions that are extremely favorable for collusion such as antitrust immunity for explicit pricing agreements known as conference agreements and enforcement of those agreements by the u s government consequently studies 1 purporting to show evidence of price discrimination in ocean shipping were considered by some proof of the obvious the ocean shipping industry exercises market power due to its unique regulatory environment policymakers presume that collusive behavior pervades the industry as evidenced by senator metzenbaum s statement that the american people simply can t afford to give ocean shipping conferences unbridled discretion to raise prices reduce capacity neutralize low cost competitors and eliminate services to ports or other customers 2 thus the conventional view is that liner conferences act as effective cartels if this view is correct then the cartels should become more effective as they face less competition from outsiders that have refrained from joining the cartel we test this hypothesis by examining how liner conferences behave as their competitive position changes ocean shipping has a truly unique regulatory structure reflecting fears about destructive competition and excess capacity that have existed since the late 1800s at that time joint price setting behavior among ocean carriers became a common practice antitrust immunity for joint pricing agreements has been formally provided by u s legislation since 1916 policymakers granted that immunity in exchange for active regulatory supervision 3 under the current regulatory structure defined in the shipping act of 1984 each route contains a conference that consists of all carriers choosing to participate in an explicit joint pricing agreement which is free from antitrust action 4 some carriers typically choose to remain outside the pricing agreement these carriers are known as independent carriers conferences must be open so that any carrier may join or exit a conference with limited notice and without explicit penalties both conferences and independent carriers are required to file their rates with the federal maritime commission fmc an agency of the u s government the fmc is charged with monitoring and enforcing the published rates when the fmc detects secret discounting from published rates by either a conference or independent carrier it punishes those parties involved by assessing fines 5 however conference members are allowed to publicly deviate from the conference rate by publishing their own freight rate on a particular transaction after notifying the conference of their intention to do so with few exceptions to be discussed later conferences prohibit their members from independently entering into contractual arrangements with shippers although the ocean shipping industry s regulatory structure appears conducive to collusion other aspects of the industry are not hospitable to anticompetitive behavior first the absence of statutory restrictions on entry implies that carriers are free to transfer ships from one route to another or to enter the industry de novo secondly many countries subsidize shipbuilding which industry participants claim results in substantial excess capacity lastly the heterogeneity of both carriers and shippers may impede collusive behavior 6 previous empirical studies have argued that liner conferences effectively collude based purely on their finding that freight rates increase as the value of the cargo increases since ocean shipping is now widely containerized i e diverse commodities are shipped in uniform boxes that are handled in a largely uniform manner these value based rate differences are considered evidence of price discrimination by an effective cartel the major flaw in these tests of collusive market power is that they do not account for costs that may be positively related to the product s value such as implied damage liability costs or costs related to the quality of service

the evolution of u s airline competition studies by academic economists were a significant force in the movement towards deregulation of the domestic airline industry in the early 1970s levine 1965 jordan 1970 keeler 1972 douglas and miller 1974 during the critical 1977 78 period in which deregulation was imposed first de facto by the civil aeronautics board cab and then de jure by congress the chairman and vice chairman of the cab were economists for the 14 years since deregulation economists have continued intensive study of the industry in part because of the unusual availability of reliable firm and transaction level data and in part because of the rare opportunity to observe an industry as it evolves from strict economic regulation to fairly unimpeded competition and strategic behavior the simplest prediction of economists about airline deregulation and one of the few on which nearly all economists agreed was that deregulation would improve consumer welfare in comparison to continued price and entry regulation fourteen years later nearly all economists still agree on this though the degree of enthusiasm for the deregulation outcome varies considerably there was substantial disagreement among economists about the market structure that would result because studies of scale economies in the airline industry had concluded that none existed beyond the scale of the smaller major airlines of the 1970s caves 1962 eads et al 1969 many economists argued that deregulation would result in more than the 11 major airlines that existed at the time of deregulation others predicted that only a few or possibly only one airline would survive at a large scale two noted university of chicago economists sam peltzman and lester telser made a bet in 1979 on whether

commodity market dynamics and the joint executive committee 1880 1886 using weekly spot and future commodity prices in chicago and new york we construct expected transportation rates for grain between these two cities expected inventory levels in new york and realized errors in the expectations of such variables we incorporate these exogenous commodity market dynamics into porter s 1983 structural modeling of the joint executive committee railroad cartel as in porter we model marginal cost as a parametric function of instrumented output among other factors unlike porter we model pricing over marginal cost as a nonparametric function of a set of variables which include expectations of deterministic demand cycles and cartel stability we estimate the pricing and demand equation simultaneously and semiparametrically our estimated weekly markups during periods of cartel stability are shown to reflect optimal collusive pricing over deterministic business cycles as modeled in haltiwanger and harrington 1991 periods of cartel instability are proven to be trigger

third degree price discrimination in the presence of congestion externality this paper analyzes third degree price discrimination of a monopoly airline in the presence of congestion externality when all markets are served the model features the business passenger and leisure passenger markets where business passengers exhibit a higher time valuation and a less price elastic demand than leisure passengers our main result is the identification of the time valuation effect of price discrimination which can work in the opposite direction as the well known output effect on welfare this time valuation effect clearly explains why discriminating prices can improve welfare even when this is associated with a reduction in aggregate output

vertical integration in a spatial setting inplications of the successive monopoly distortion abstract we extend earlier analyses of spatial markets to a vertical setting in which firms at both the upstream and downstream level face transportation costs and sunk cost investments depending on the costs of integration and the size of the successive monopoly distortion loss vertical integration may be partial total or not at all

selling costs and switching costs explaining retail gasoline margins recent theoretical work has shown that price discrimination can take place in imperfectly competitive as well as monopoly markets the persistence of higher retail margins on unleaded than on leaded gasoline during the 1980s suggests that discrimination may occur even in very competitive markets this article studies a number of cost based explanations for such gasoline pricing as well as the possibility of price discrimination the analysis indicates that gas stations discriminate against groups of customers who are less likely to switch to another station the conclusions highlight the influence of shopping or search costs on pricing decisions even in markets thought to be quite competitive

airline pricing behavior under limited inter modal competition this paper empirically analyzes airline pricing for short haul flights in contexts with no credible threat of inter modal competition to this end we explore the southern italian market since it is less accessible by other transport modes and thus fares are the direct outcome of air related competition we show in fact that market power matters depending on the level of intra modal competition and that airlines apply differentiated mark ups besides consistent with the implementation of inter temporal price discrimination ipd we find a non monotonic inter temporal profile of fares with a turning point included in the interval of the 43rd to 45th days before departure finally we provide evidence that in more competitive markets airlines are more likely to engage in ipd jel l11 l13 l93

group purchasing nonlinear tariffs and oligopoly abstract loyalty discounts are nonlinear tariffs that condition rebates or marginal prices on meeting aggregate purchase or market share targets these discounts are widespread and are often the impetus for consumers to form buying groups or group purchase organizations gpos this paper models the competitive effects of the introduction of a gpo into a market within which the preferences of the gpo s members are horizontally differentiated while nonlinear tariffs are an effective way for a monopolist to extract consumer surplus when two suppliers compete using such schedules the results are far more competitive in comparison to simple bertrand nash competition with linear tariffs this result holds when the product of each of the suppliers is attractive to a substantial portion of consumers in our model the nonlinear schedule puts all customers in play to a degree that contrasts sharply with the competition at the margin characteristic of constant per unit prices moreover competing in nonlinear tariffs removes allocative inefficiency that can result from single price competition

package size and the suppression of variety in contrast to the result for a single product monopoly all or nothing offers are shown to strictly dominate two part tariffs when more than one good is sold moreover either form of price schedule creates an incentive to suppress product variety which is absent under linear pricing

price discrimination and social welfare 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

a theory of quality related differences in retail margins why there is a premium on premium gasoline this paper develops a theory of vertical and horizontal product differentiation to explain observed price cost margin differentials for goods that differ in quality the difference in price cost margins between the high and low quality goods is shown to depend positively on consumers average valuation for incremental increases in quality and positively on the distance to each competitor s closest rival these predictions are largely supported using an extensive station level data set of premium and regular unleaded gasoline prices from the los angeles basin area from 1992 1995

fighting collusion by permitting price discrimination we investigate the effect of a ban on third degree price discrimination on the sustainability of collusion we build a model with two firms that may be able to discriminate between two consumer groups two cases are analyzed i best response symmetries so that profits in the static nash equilibrium are higher if price discrimination is allowed ii best response asymmetries so that profits in the static nash equilibrium are lower if price discrimination is allowed in both price discrimination scenarios firms discount factor has to be higher in order to sustain collusion in grim trigger strategies than under uniform pricing

a model of search with price discrimination abstract we introduce observable heterogeneity across buyers into a model of simultaneous search buyers differences are informative about their willingness to search giving rise to price discrimination even if they all have the same willingness to pay we analyze and compare equilibrium outcomes when price discrimination is allowed and when it is not we find that the price comparison across consumers as well as the effects of banning price discrimination critically depend on the elasticity of the search cost distribution interestingly for normally distributed search costs there is an inverted u shape relationship between prices and buyers size similarly a ban on price discrimination hurts small and large buyers to the benefit of the medium size ones

dynamic price discrimination with asymmetric firms this paper considers variants of a dynamic duopoly model where one firm has a stronger market position than its competitor consumers past purchases may reveal their different valuations for the two firms products price discrimination based on purchase histories tends to benefit consumers if it does not cause the weaker firm to exit otherwise it can harm consumers the effect of price discrimination also depends on firms cost differences market competitiveness and consumers time horizon the stronger firm may price below cost in the presence of consumer switching costs with the purpose and effect of eliminating competition

price discrimination in oligopoly evidence from regional newspapers recent theoretical work has shown that the incentive to target rival firms customers with low prices can increase price discrimination and that the strength of the incentive depends on a firm s market position using data on swedish newspaper subscriptions we find strong support for these predictions newspapers with a local competitor sell a larger part of their circulation at a discount than monopoly newspapers moreover in competitive markets the use of discounts is inversely related to the newspaper s market share we find no evidence that price discrimination based on observable and exogenous characteristics is influenced by the market structure

antitrust transaction costs and merger simulation with nonlinear pricing abstractthis article explores the relationship between transaction costs and antitrust it makes three points first the usual antitrust analysis can be seriously misleading as a guide to consumer or society welfare because it assumes that pricing is linear and uniform but the type of pricing endogenously depends on transaction costs including information costs second two key issues in any antitrust analysis are whether transaction costs change as a result of the action under scrutiny and regardless of whether they change how the existence of nonlinear pricing alters the usual antitrust analysis we develop a merger simulation model with nonlinear pricing to illustrate how misleading the standard analysis can be third since transaction costs influence the ability of various coalitions of consumers distributors and manufacturers to form cooperative game theory can provide a unifying perspective into what situations might give rise to the creation and exploitation of market power

parallel imports demand dispersion and international price discrimination parallel imports goods imported by unauthorized resellers are advocated worldwide for undermining international price discrimination for a continuum of markets we find that uniform pricing by a monopolist yields lower global welfare than third degree discrimination if demand dispersion across markets is large though uniform pricing avoids output misallocation too many markets go unserved mixed systems permitting discrimination across but not within designated groups of markets yield significantly higher welfare than uniform pricing or unrestricted multimarket discrimination and can pareto dominate uniform pricing thus while parallel imports might benefit some countries our results weaken the multilateral case for allowing them

the efficiency of advance purchase discounts in the presence of aggregate demand uncertainty abstract the pricing behavior of two airlines is examined one is operated by a welfare maximizing social planner the other by an unregulated monopolist total capacity is fixed and aggregate demand is uncertain it is shown that advance purchase discounts can assist in attaining an efficient allocation of capacity when it is not feasible to operate a spot market on the day of the flight it is further shown that the planner may offer larger or smaller discounts than the monopolist

price dispersion in the grocery market this paper provides an exploratory study of price dispersion in the grocery market and checks for the consistency of the evidence on this price dispersion with the existing theories of price dispersion due to costly consumer search competition and consumer heterogeneity in the context of the grocery market three dimensions of price dispersion are studied price dispersion for a certain brand across stores price dispersion within a category in a store across brands and price dispersion over time for a certain brand the results show that the standardized price dispersion is positively correlated with consumer search costs competition and consumer heterogeneity

non discrimination clauses in the retail energy sector the british energy regulator will soon review a non discrimination licence condition which it imposed to ensure that energy retailers charge the same mark up in different regions many consumers are loyal to incumbent firms necessitating heavy discounting by entrants to attract customers which had led to regional price discrimination matching characteristics of the energy market to models of discrimination we identify the necessary conditions for the licence condition to have a positive effect for consumers and explore whether the policy has helped potentially vulnerable consumers we conclude that the most likely effect of the licence condition is to reduce competition in the mainstream energy markets and welcome the regulator s latest review of the retail market

price discrimination in australia s retail electricity markets an analysis of victoria southeast queensland when capital intensive monopoly industries are restructured and deregulated consumer prices commence a natural drift from regulated uniform average cost tariffs to competitive differential prices and this can raise problems for policymakers deep discounts are welcomed high standing offers are not but price discrimination is unremarkable in economics indeed in industries where fixed sunk costs represent a significant portion of total cost discriminatory pricing is usually welfare enhancing conversely theory predicts and empirical evidence confirms that regulatory efforts to cherry pick differential prices in asymmetric markets will damage consumer welfare in this article we analyse differential retail electricity offer prices in the australian states of victoria and queensland and contrast these with industry average total cost and the marginal cost of retail supply we find deregulated victoria displays high price dispersion with standing offer tariffs 10 above industry average total cost and marginal offers at break even prices i e 20 below average total cost in the semi regulated southeast queensland market where a regulated price cap exists there is lower dispersion but marginal offers include a 6 7 retail mark up efficient pricing requires the marginal unit produced to be priced at marginal cost and victoria meets this criteria but we identify an episode of inter consumer misallocation due to high standing offers we conclude policy initiatives designed to help firms shift vulnerable households from standing offer tariffs is desirable

price discrimination in grocery trade evidence from italy this paper investigates the determinants of price dispersion between staple and non staple goods in grocery retailing as the result of pricing decisions by multiproduct firms theoretical predictions about the nature of supermarkets pricing behaviour are compared and tested empirically using disaggregated data from the italian grocery trade over the period 1990 1992 the empirical results provide evidence for the existence in all types of retail organization of the form of price discrimination suggested by bliss particularly for specialist shops the results are consistent with discrimination due to the exploitation of consumers switching costs

welfare increasing third degree price discrimination when demand functions in different markets are derived from distributions of reservation prices that differ only in their means conditions exist such that third degree price discrimination leads to greater total output and greater total welfare welfare is higher with discrimination than with a uniform price when demand functions are derived from logistic distributions with different means welfare and consumer surplus are higher with discrimination for demands derived from a distribution related to the pareto in general whether discrimination increases total output depends on demand being more convex in markets in which prices fall with discrimination than in those in which prices rise

equilibrium price dispersion under demand uncertainty the roles of costly capacity and market structure when capacity is costly and prices are set in advance firms facing uncertain demand will sell output at multiple prices and limit the quantity available at each price i show that the optimal price strategy of a monopolist and the unique pure strategy nash equilibria of oligopolists both exhibit intrafirm price dispersion moreover as the market becomes more competitive prices become more dispersed a pattern documented in the airline industry while generating similar predictions the model differs from the revenue management literature because it disregards market segmentation and fare restrictions that screen customers

reverse price discrimination with bayesian buyers this paper studies price discrimination under the situation in which buyers prior valuations are initially observable by a seller but buyers receive further information about a product or service which remains private thereafter the buyers interpret new information via bayes rule we show that in this environment prices are not monotone in buyers prior valuations interestingly this results in the possibility that a seller intentionally offers a higher price to a low valuation buyer rather than a high valuation buyer reverse price discrimination we derive this result in both monopoly and duopoly markets

first degree price discrimination goes to school personalized pricing is widely discussed but seldom observed making studies of its efficacy rare yet first degree price discrimination is common in the pricing of higher education and i use data on prices and the characteristics of students admitted to a professional graduate program at a public university to estimate a matriculation demand function i then derive linear pricing functions that maximize revenue for a target number of students by allowing these functions to depend on progressively richer sets of observables i explore the effect of personalization of pricing on profit tailoring prices to a one dimensional measure of student quality would raise revenue by 2 2 per cent above the revenue with uniform pricing pricing based on both student quality and state residency raises revenue by 8 4 per cent and further tailoring based on available observables raises prices 9 0 per cent above the maximum revenue under uniform pricing pricing that obeys current statutory tuition limits raises revenue less but still by just over half as much i also infer the welfare weights that the pricing process implicitly attaches to student characteristics

liberalizing a distribution system the european car market we quantify the competitive effects of liberalizing the selective and exclusive distribution system in the european car market based on a model of oligopoly pricing with differentiated products we consider two possible competitive effects from liberalization i the creation of international intrabrand competition cross border trade which will result in a reduction of international price discrimination and ii a possible cumulative effect arising from a strengthening of national intrabrand competition which would result in reduced double marginalization we find that the reduction in international price discrimination mainly redistributes consumer gains across countries it has a positive but modest effect on total welfare if liberalization also has the cumulative effect of reducing double marginalization the welfare effects are much higher finally we find that the effects of liberalization on the manufacturers profits are either small or positive this finding implies that international price discrimination and softening competition through a double marginalization mechanism should not be interpreted as main profit motives for the previous distribution system but only as unintended side effects hence the industry rationale for maintaining the previous distribution system should be sought in other areas jel f15 l42

the effects of third degree price discrimination in oligopoly retail firms and restaurants commonly offer senior citizen discounts i suspect this practice is not motivated by altruism rather the behavior can be better explained as profit maximizing price discrimination these firms are setting a low price in a market which probably has high elasticity of demand but why should the demand of senior citizens be more elastic than average one possibility is that elderly people have below average income and they would not eat out if restaurant prices were high perhaps a more plausible explanation is that retired people simply have more time on their hands to spend commuting across town to take advantage of discounts the purpose of these discounts may then be to lure senior citizens away from other restaurants rather than to get them out of the house the analysis of third degree price discrimination has a long history a c pigou 1920 joan robinson 1933 and two articles on the subject have recently appeared in this review richard schmalensee 1981 hal varian 1985 the industry structure in these analyses is monopoly but an explicit model of some form of competition is obviously needed to study discriminatory discounts meant to attract customers from rival firms and even discounts meant to get people out of the house may have an oligopoly analysis which is qualitatively different from their monopoly anlysis in this paper i present a simple duopoly model of a differentiated products industry i show that a firm s price elasticity of demand in a market can be expressed as the sum of two parts the industry demand elasticity and the cross price elasticity the first measures the tendency of consumers in a market to stay home when the price goes up the second the tendency to switch suppliers in the monopoly case in which the crossprice elasticity is zero and the collusive case in which the cross price elasticity is irrelevant discrimination between markets is due to differences in industry demand elasticity in the noncooperative oligopoly case equilibrium price differentials can be accounted for both by differences in cross price elasticity as well as differences in industry demand elasticity total industry output when the firms can discriminate between two markets is compared to what it would be if discrimination were impossible which regime has larger output depends on the sum of the adjustedconcavity condition and the elasticity ratio condition the first predominates when the rival products are poor substitutes and the firms have approximate monopoly power while the second predominates at the other extreme where the products are close substitutes and the firms have almost no market power the adjusted concavity condition compares the relative curvature of demands in the two markets and was originally discovered by robinson 1933 in her analysis of monopoly price discrimination the elasticity ratio condition compares the relative difference in industry demand elasticity between the two markets with the relative difference in cross price elasticity according to the elasticity ratio condition a discriminatory discount due to high industry elasticity of demand would be more likely to increase total output than one due to high cross price elasticity the effect of discrimination on profit is also discussed the distinction made here department of economics university of wisconsin madison madison wi 53706 this paper is a revision of part of my doctoral dissertation i am grateful to steve matthews ken judd and john panzar for guidance in this research i also thank seminar participants at wisconsin the justice department and the 1986 econometric society meetings in new orleans and the discussant martin perry the excellent comments of the referees improved the exposition of the paper

evidence of directional price discrimination in the u s airline industry abstract this paper explores possible determinants that may affect an airline s decision to charge passengers different roundtrip fares depending on trip origin a case of directional price discrimination such fare differences cannot be the result of differences in cost as the cost of flying a roundtrip passenger does not significantly differ depending on direction it is argued that directional fare differences result from airlines recognizing that passenger price elasticities differ between route endpoints a price discriminating airline will then charge a higher roundtrip fare at the endpoint where the passenger price elasticity of demand is comparatively lower evidence is found suggesting that airlines do use differences in income to price discriminate when setting roundtrip fares fares are found to be 0 18 0 43 higher on average for each 1000 difference in average per capita income between origin and destination metro areas this finding is sensible assuming that higher incomes reduce the price elasticity of demand for air travel with richer passengers being less sensitive to the cost of travel

dynamic oligopoly pricing evidence from the airline industry we explore how pricing dynamics in the european airline industry vary with the competitive environment our results highlight substantial variations in pricing dynamics that are consistent with a theory of intertemporal price discrimination first the rate at which prices increase towards the scheduled travel date is decreasing in competition supporting the idea that competition restrains the ability of airlines to price discriminate second the sensitivity to competition is substantially increasing in the heterogeneity of the customer base reecting further that restraints on price discrimination are only relevant if there is initial scope for price discrimination these patterns are quantitatively important explaining about 83 percent of the total within ight price dispersion and explaining 17 percent of the observed cross market variation of pricing dynamics

an empirical investigation of the welfare effects of banning wholesale price discrimination rand 054 rand2007 cls 1994 07 13 v1 2u standard latex document class rand rand 054 dispatch 12 7 2008 ce n a journal msp no no of pages 26 pe sharon rand journal of economics vol 40 no 1 spring 2009 pp 20 45 an empirical investigation of the welfare effects of banning wholesale price discrimination sofia berto villas boas economic theory does not provide sharp predictions on the welfare effects of banning wholesale price discrimination if downstream cost differences exist then discrimination shifts production inefficiently toward high cost retailers so a ban increases welfare if differences in price elasticity of demand across retailers exist discrimination may increase welfare if quantity sold increases so a ban reduces welfare using retail prices and quantities of coffee brands sold by german retailers i estimate a model of demand and supply and separate cost and demand differences simulating a ban on wholesale price discrimination has positive welfare effects in this market and less if downstream cost differences shrink or with less competition introduction wholesale price discrimination means that an upstream firm sets different prices for the same product for various downstream retailers wholesale price discrimination is commonly practiced in many markets examples include markets such as petroleum distribution steel heavy trucking tobacco and pharmaceuticals in several countries milk and other dairy products are sold using government administered or sanctioned discriminatory pricing schemes wholesale price discrimination practices are also used for services such as loans insurance and advertising 1 competition authorities have been concerned with wholesale price discrimination the european union treaty s article 82 c prohibits practices where a dominant firm would place trading partners at a competitive disadvantage the u s robinson patman act forbids discriminat ing in price between different purchasers where the effect may be to lessen competition unless the university of california berkeley sberto are berkeley edu i thank the editor igal hendel and two anonymous referees for many helpful comments and max auffhammer cyndi berck peter berck gal hochman silke januszewski forbes george judge kai uwe k uhn diana lazo mark muendler aviv nevo ariel pakes jeff perloff andrew sweeting miguel villas boas and participants at uc san diego university of michigan the inra idei conference in toulouse and the university of british columbia summer conference in industrial organization for their suggestions i thank daniel klapper for letting me have access to the data support from the giannini foundation and from an aes grant are gratefully appreciated see for gasoline markets texaco v hasbrouck 496 us 543 no 87 2048 1990 and the new york state motor fuel marketing practices act for steel chan hall and rust 2003 for heavy trucking volvo trucks north america inc v reeder simco gmc inc docket no 04 905 for tobacco brooke group ltd v brown and williamson tobacco corp 509 us 209 no 92 466 1993 for wholesale pharmaceuticals see http www datcp state wi us trade business unfair comp drug price jsp for dairy markets see for example gardner 1984 and for services see givens 1983 c 2009 rand copyright

welfare and output in third degree price discrimination a note abstract one main result on the welfare effects of third degree price discrimination by a monopolist is that an increase in total output is a necessary condition for welfare improvement this note provides two examples showing that this proposition does not generalize to an oligopoly with heterogenous firms in these examples price discrimination makes competition more favorable to the low cost firm this induces a cost saving that overcomes the welfare loss associated with price discrimination

the welfare effects of third degree price discrimination in a differentiated oligopoly this article examines the welfare effects of third degree price discrimination under oligopolistic competition with horizontal product differentiation we derive a necessary and sufficient condition for price discrimination to improve social welfare the degree of substitution must be sufficiently greater in the strong market where the discriminatory price is higher than the uniform price than in the weak market where it is lower it is verified however that consumer surplus is never improved social welfare improves solely owing to an increase in the firms profits in the case of linear demands jel d43 l11 l13 i introduction this article examines the welfare effects of oligopolistic third degree price discrimination explicitly considering product differentiation as a source of market power and strategic interaction product differentiation is one of the main reasons why firms can enjoy market power it enables them to sell products that are no longer perfect substitutes for example coca cola and pepsico sell similar types of soda although it is arguable that they differ in taste each firm thereby attracts some consumers over another as a form of price discrimination coca cola was once reported to be testing a vending machine that would automatically raise prices in hot weather 1 although the plan triggered nationwide controversy and coca cola had to abandon the project as a result it could have changed the regime of uniform pricing to one of price discrimination in the soda market how would the resulting change affect consumer welfare and firms profits in other words is third degree price discrimination good or bad answering this question is important because it helps us to evaluate price discrimination under oligopoly in this article we focus on horizontal product differentiation to consider substitutability as well as complementarity 2 by assuming a linear quadratic utility function of a representative consumer and focusing on the symmetric equilibrium of a pricing game we characterize the conditions relating to such demand properties as substitutability and complementarity required for price discrimination to improve social welfare more specifically we derive a necessary and sufficient condition for price discrimination to improve social welfare the degree of substitution must be sufficiently greater in the strong market where the discriminatory price is higher than the uniform price than in the weak market where it is lower it is also shown that aggregate output must increase for price discrimination to improve social welfare we verify however that consumer surplus is never improved by price discrimination welfare improvement from price discrimination is solely owing to an increase in firms profits in the example above the degree of substitution would be higher in the strong market i e when the temperature is high because consumers care less about which brand when it is hot weather our analysis below implies that social welfare might improve in this case the degree of substitution can vary across markets even if consumers in each market face exactly the same products because consumers taste depends on various market specific factors such as geographical and natural conditions if the strong market is where consumers demand a product more eagerly caring less about which brand in the above example individuals demand soda more eagerly in hot weather then our results suggest that price discrimination has large potential to improve social welfare 3 why does allowing price discrimination improve social welfare notice that there are two forces that determine equilibrium prices in price setting oligopoly a larger market size raises the price whereas a larger substitutability parameter lowers the price for price discrimination to raise social welfare it is necessary that a high degree of substitutability mitigates an increase in the discriminatory price in the larger market

competition of firms discriminatory pricing and location1 two costlessly mobile firms are to be located in a market region a subset of the plane the firms compete by setting locations and delivered price schedules to study this competitive stiuation an appropriate extensive form game is defined along with an appropri ate noncooperative solution concept existence and general properties of the equilibrium are demonstrated among the results are each firm increases its profit by locating so as to decrease total cost to both firms of serving the market firms will never locate coinciden tally if they have identical production costs and transport cost rates or if these are different and the firms are located in a circular market region having a uniform demand distribution this paper studies competition between two profit maximizing firms in space who are costlessly mobile and may discriminate in price we will allow the firms to set locations and delivered price schedules and we will be concerned with the existence and properties of equilibria in location and price starting with hotelling 9 the spatial competition literature has focused on location on bounded linear markets by two or more firms hotelling assumed identical firms that produced a single good with constant cost of production and considered consumers to be uniformly distributed and to have inelastic demand he also assumed that the consumers pay transport cost and purchase the good from the cheapest source hotelling claimed that a nash equilibrium in locations for the two firm market existed and yielded back to back locations at the center of the market many authors most recently d aspremont gabszewicz and thisse 2 have noted that an equilbrium in prices and location does not exist for hotelling s model however if the firms employ identical exogeneously specified prices hotelling s conclusions hold subsequent work by smithies 14 hartwick and hartwick 7 and eaton 3 claimed to show that a nash equi librium in f o b prices and locations can exist in markets with a uniform distribu tion of consumers each of whom have identical elastic demand functions for the two and three firm problems the work of d aspremont et al casts doubt on these conclusions without the adoption of restrictive conditions our work contrasts with these works and related research which has dealt with linear markets with uniform distributions of customers and with identical firms our work will involve markets that are subsets of the plane having nonuniform distributions of customers our firms will be allowed to be different that is have differences in production and transport costs however the fundamental difference in our approach is that our firms will set discriminatory prices and not price f o b in many ways our work will represent the discriminatory pricing