Third-degree Price Discrimination, Heterogeneous Markets and Exclusion

Abstract

This short paper analyzes the effect of heterogeneity of markets in terms of income on the exclusion of markets under uniform price by considering linear demand curves in all markets. We show that more markets (and consumers) are excluded the higher are the inter-market income differences, and that adding markets, even with lower reservation prices than in existing ones, helps to decrease the price and thus make more markets served. The multiple market case turns out to be not an insignificant extension of the two-market case. We also address the welfare implications of price discrimination and show that discrimination could be beneficial or inefficient, crucially depending on the inter-market wealth distribution.