CFDP 2213

Third-degree Price Discrimination Versus Uniform Pricing

Author(s): 

Publication Date: December 2019

Pages: 21

Abstract: 

We compare the revenue of the optimal third-degree price discrimination policy against a uniform pricing policy. A uniform pricing policy offers the same price to all segments of the market. Our main result establishes that for a broad class of third-degree price discrimination problems with concave revenue functions and common support, a uniform price is guaranteed to achieve one half of the optimal monopoly profits. This revenue bound obtains for any arbitrary number of segments and prices that the seller would use in case he would engage in third-degree price discrimination. We further establish that these conditions are tight, and that a weakening of common support or concavity leads to arbitrarily poor revenue comparisons.

Keywords: First Degree Price Discrimination, Third Degree Price Discrimination, Uniform Price, Approximation, Concave Demand Function, Market Segmentation

JEL Classification Codes: C72, D82, D83

JEL Classification Codes: C72D82D83

See CFDP Version(s): CFDP 2213R