CFDP 1896R2

The Limits of Price Discrimination

Author(s): 

Publication Date: May 2013

Revision Date: April 2014

Pages: 56

Abstract: 

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.

Keywords: 

First degree price discrimination, Second degree price discrimination, Third degree price discrimination, Private information, Privacy, Bayes correlated equilibrium, Concavification

JEL Classification Codes:  C72, D82, D83