A conduct parameter model of price discrimination

AuthorLevent Kutlu
Publication Date01 November 2017
DOIhttp://doi.org/10.1111/sjpe.12135
A CONDUCT PARAMETER MODEL
OF PRICE DISCRIMINATION
Levent Kutlu*
,
**
ABSTRACT
We consider a conduct parameter model where firms price discriminate based on
the consumers’ willingness to pay. For any conduct, the average price is invari-
ant to the extent of price discrimination. Moreover, when the number of prices
goes to infinity, there is a linear relationship between market power, measured
by conduct, and range of offered prices. Hence, when the firms face competition,
some of the high valuation customers are charged below their valuations, which
contrasts with perfect price discrimination results for a monopoly.
II
NTRODUCTION
Hazledine (2006) extends the standard Cournot-Nash oligopoly model to
encompass second-degree price discrimination.
1
The firms can segment cus-
tomer demand by ranges of reservation prices. In particular, the customers
with reservation prices between r
1
and r
2
pay one price, those with reservation
prices between r
2
and r
3
pay another price, and so on. This approximates the
first-degree price discrimination based on the willingness to pay of customers.
He shows that when the demand is linear and the firms are symmetric (i.e.,
same marginal costs), the average price does not depend on the extent of price
discrimination. An implication is that the average price in this price discrimi-
nation setting would be the same as the standard Cournot-Nash price where
there is no discrimination. Bak
o and K
alecz-Simon (2012) show that the
invariance result still holds when the firms are asymmetric. Moreover, Kutlu
(2012) shows that Hazledine’s invariance result prevails under a more general
functional form assumption for demand.
Hazledine (2010) uses the same model to examine the consequences of
many prices, analogous to first-degree monopoly price discrimination. He
motivates his price discrimination model using the air travel markets. One
strong empirical regularity in these markets is that leisure travelers are usually
willing to commit themselves well in advance to a trip. On the other hand,
*Georgia Institute of Technology
**Antalya International University
1
Hazledine (2015) provides a discussion of the etymology of price discrimination. Also,
Stole (2007) provides general overviews of the literature on price discrimination.
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12135, Vol. 64, No. 5, November 2017
©2017 Scottish Economic Society.
530

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