Endogenous price discrimination with asymmetric firms

Abstract

We explore a third-degree spatial price discrimination model within the context of asymmetric duopolies. We find that if the degree of asymmetry is small, both firms charge uniform price is the unique sub-game perfect Nash equilibrium. As the degree of asymmetry reaches intermediate, there exists no pure strategy sub-game perfect Nash equilibrium. In the mixed strategy equilibrium, both firms price discriminate with certain probability. When the degree of asymmetry is large, there exists one or two asymmetric equilibria: the advantaged firm price discriminating and the disadvantaged firm uniformly pricing IN and vice versa in the other NI. In both equilibria, the price-discriminating firm consistently benefits, and the uniform-pricing firm also experiences higher profits when the degree of asymmetry is large, despite being driven out of the smaller market. Moreover, when the asymmetry is large enough, social welfare can also be higher.