Output and Welfare Implications of Oligopolistic Third-Degree Price Discrimination

Abstract

Using estimable concepts, this paper provides sufficient conditions for third-degree price discrimination to increase or decrease aggregate output, social welfare, and consumer surplus in differentiated oligopoly when all discriminatory markets are open even in the absence of price discrimination. Specifically, we allow cost differences to exist across separate markets, and demonstrate that under general demand functions, our sufficient conditions entail a cross-market comparison of multiplications of two or three of the following key endogenous variables: pass-through value, conduct index, and markup value. Notably, the welfare results based on these “sufficient statistics” can readily be extended to accommodate heterogeneous firms, which suggest that our analysis can be used as a building block for empirical analysis of third-degree price discrimination and welfare effects.