Competitive differential pricing

Abstract

This paper analyzes welfare under differential versus uniform pricing across oligopoly makes that differ in costs of service. We establish necessary and sufficient conditions on demand properties—cross/own elasticities and curvature—for differential pricing by symmetric firms to raise aggregate consumer surplus, profit, and total welfare. The analysis reveals intuitively why differential pricing is generally beneficial though not always—including why profit can fall, unlike for monopoly—and why it is more beneficial than oligopoly third-degree price discrimination. When firms have asymmetric costs, however, differential pricing can reduce profit or consumer surplus even with ‘simple’ demands such as linear.