Recent Developments in the Economics of Price Discrimination

Abstract

This paper surveys the recent literature on price discrimination. The focus is on three aspects of pricing decisions: the information about customers available to firms; the instruments firms can use in the design of their tariffs; and the ability of firms to commit to their pricing plans. Developments in marketing technology mean that firms often have access to more information about individual customers than was previously the case. The use of this information might be restricted by public policy towards customer privacy. Where it is not restricted, firms may be unable to commit to how they use the information. With monopoly supply, an increased ability to engage in price discrimination will boost profit unless the firm cannot commit to its pricing policy. Likewise, an enhanced ability to commit to prices will benefit a monopolist. With competition, the effects of price discrimination on profit, consumer surplus and overall welfare depend on the kinds of information and/or tariff instruments available to firms. The ability to commit to prices may damage industry profit. INTRODUCTION This paper surveys, in a highly selective manner, recent progress that has been made in the economic understanding of price discrimination. One can say that price discrimination exists when two “similar” products with the same marginal cost are sold by a firm at different prices.

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