On the Alignment of Consumer Surplus and Total Surplus under Competitive Price Discrimination

Häckner (2000, Journal of Economic Theory 93, 233–239) shows that in a differentiated oligopoly with more than two firms, prices may be higher under Bertrand competition than under Cournot competition, implying that the classical result of Singh and Vives (1984, Rand Journal of Economics, 15, 546–554) that Bertrand prices are always lower than Cournot prices is sensitive to the duopoly assumption. Häckner (2000, Journal of Economic Theory, 93, 233–239), however, leaves unanswered the important question of whether welfare may be lower under price competition. This note shows that in Häckner’s model both consumer surplus and total surplus are higher under price competition than under quantity competition, regardless of whether goods are substitutes or complements.

Sharing demand information in competing supply chains with greening efforts.

We compare the equilibria under Bertrand and Cournot competition in the spatial barbell model where spatial barriers and process R&D are involved. We show that when the market becomes more competitive by switching from Cournot to Bertrand competition, R&D investment may increase (decrease) depending upon a low (high) transport rate. Next, we find that under Cournot competition total output, consumer surplus, and welfare are higher, but profit is lower than is true for Bertrand competition, when the transport rate is high, which overturns the traditional result.

This article examines the impact of parallel supply shifts that cause supply to transition from elastic to inelastic on consumer, producer, and total surplus. We show that parallel rightward shifts of the supply curve cause consumer surplus and total surplus to increase unambiguously. On the other hand, producer surplus increases, reaches a maximum in the inelastic portion of both the demand and supply curves and then declines. This implies that innovations of this sort eventually result in consumers appropriating a higher share of total surplus. Finally, the maximum points for various producer surplus curves fall on a line which begins at the highest point of the total revenue curve and ends at the lower right corner of the total revenue curve.

We analyze the welfare consequences of a monopolist having additional information about consumers' tastes, beyond the prior distribution; the additional information can be used to charge different prices to different segments of the market, i.e., carry out third degree price discrimination. We show that the segmentation and pricing induced by the additional information can achieve every combination of consumer and producer surplus such that: (i) consumer surplus is non-negative, (ii) producer surplus is at least as high as profits under the uniform monopoly price, and (iii) total surplus does not exceed the surplus generated by efficient trade.

We analyze the welfare consequences of a monopolist having additional information about consumers' tastes, beyond the prior distribution; the additional information can be used to charge different prices to different segments of the market, i.e., carry out “third degree price discrimination.” We show that the segmentation and pricing induced by the additional information can achieve every combination of consumer and producer surplus such that: (i) consumer sur plus is nonnegative, (ii) producer surplus is at least as high as profits under the uniform monopoly price, and (iii) total surplus does not exceed the surplus generated by efficient trade. (JEL D42, D83, L12)

We analyze the welfare consequences of a monopolist having additional information about consumers' tastes, beyond the prior distribution; the additional information can be used to charge different prices to different segments of the market, i.e., carry out third degree price We show that the segmentation and pricing induced by the additional information can achieve every combination of consumer and producer surplus such that: (i) consumer surplus is non-negative, (ii) producer surplus is at least as high as profits under the uniform monopoly price, and (iii) total surplus does not exceed the efficient gains from trade. As well as characterizing the welfare impact of price discrimination, we examine the limits of how prices and quantities can change under price discrimination. We also examine the limits of price discrimination in richer environments with quantity discrimination and limited ability to segment the market.

Piracy on the Internet: Accommodate it or fight it? A dynamic approach

We compare an n-firm Cournot model with a Stackelberg model, where n-firms choose outputs sequentially, in a stochastic demand environment with private information. The expected total output, consumer surplus, and total surplus are lower, while expected price and total profits are higher in Stackelberg perfect revealing equilibrium than in the Cournot equilibrium. These rankings are the opposite to the rankings of prices, total output, surplus, and profits under perfect information. We also show that the first n-1 firms' expected profits form a decreasing sequence from the first to the (n-1)st in the Stackelberg game. The last mover earns more expected profit than the first mover if n<5 or the ratio of the signals' informativeness to the demand certainty is sufficiently low. Lastly, there is a discontinuity between the Stackelberg equilibrium of the perfect information game and the limit of Stackelberg perfect revealing equilibria, as the noise of the demand information of all firms vanishes to zero at the same rate. We provide various robustness checks for the results when the precision of signals are asymmetric, there is public information or cost/quality uncertainty, or the products are differentiated.

When demand is noisy and firms’ costs are private information, the availability of market share data increases the accuracy of each firm’s information, and it creates incentives for signaling. Taking both effects into account, we find that under quantity competition with a homogeneous good, the availability of market share data has a positive impact on total surplus and an ambiguous one on consumer surplus. Under price competition with differentiated substitutes, it has a negative impact on consumer surplus and an ambiguous one on total surplus. If the cost difference is small, the effect of first-period signaling dominates the effect of second-period full information. Accordingly, in this case, the availability of market share data causes total and consumer surplus to increase in the case of quantity competition and to decrease in the case of price competition.JEL classification: C73, D82, L13.

The primary function of socioeconomics is to ask questions and broaden the discussion. I have attempted to do that by unpacking and contextualizing the two economic goals of antitrust law – maximizing consumer surplus and allocative efficiency. I have avoided what I believe is today’s faith-based approach as exemplified by the Supreme Court. That approach has now gone beyond economics and seems to reveal, in its most benign form, a deep distrust of government. At its most basic and obvious level the two antitrust goals cede to those with income – earned or not – the right to determine how scarce resources will be used. That may be fine in many respects and may be far superior to any other method. The problem is that consumer surplus is under-inclusive, recognizes only a small universe of values, and falls well short of measuring actual well-being. When the focus is on allocative efficiency and costs of production, antitrust courts and enforcement agencies are unlikely to recognize all costs and can perpetuate a race to exploit. To the extent the race to exploit is repugnant to some, they may be able to express that in markets but only to a limited extent.

An unavoidable aspect of electronic commerce is the collection of personal information. Although personal information is paramount to improving services and designing personalized offerings, its collection and use also generates privacy concerns. This study analytically examines the optimal information collection and usage practices in the presence of privacy costs. We use an analytical model in which a firm makes decisions on pricing, level of information collection and customization, and the extent of cross-selling. We find that cross-selling opportunities create value for consumers and sellers since consumer surplus and total profits may both increase with cross-selling. Advances in information technology motivate cross-selling and provide more incentives for the firms to engage in cross-selling. Consequently, firms are better off when cross-selling while offering customized products even in the presence of privacy costs. We find that serving a niche market and limiting the demand is a winning strategy when consumers' value for customization increases. On the other hand, an increase in the profitability of cross-selling favors a mass market strategy in which a firm serves a broader range of customers. Interestingly, cross-selling strategies may lower prices and provide significant strategic advantages with increased customer satisfaction while reaching a broader market. Total surplus increases at a decreasing rate as the amount of information collection and the extent of cross-selling increase. A niche marketing strategy facilitated by improvements in customization technology increases both consumer and total surplus.

A two-sided model of paid peering

We show the effects of cross‐ownership on product differentiation, consumer surplus and welfare under Cournot and Bertrand competition. Under Cournot competition, cross‐ownership increases (decreases) product differentiation if demand expansion following product differentiation is large (small). Under Bertrand competition, cross‐ownership may increase or decrease product differentiation regardless of the demand expansion effect of product differentiation. Cross‐ownership may increase consumer surplus and welfare under both Cournot and Bertrand competition. Demand expansion following product differentiation and the type of product market competition play important roles for the effects of cross‐ownership in an industry with endogenous product differentiation. We also show that Cournot competition may create higher consumer surplus and welfare compared with Bertrand competition.

The value of product recall insurance in a price competition with financially constrained suppliers