Impact of Third-Degree Price Discrimination on Welfare under the Asymmetric Price Game

Abstract

Whether third-degree price discrimination improves or damages social welfare has always been a hot topic for scholars of economics. At present, research studies on the impact of third-degree price discrimination on welfare have not been carried out under asymmetric price competition. To this end, we studied this problem. In the research process, we divided consumers into two market segments by setting different travel costs based on the Hotelling model; at the same time, we considered three scenarios in which both firms engage in uniform pricing, both engage in price discrimination, and price discrimination vs. uniform pricing, and some intriguing findings and conclusions that differ from the previous studies were obtained through game analysis: (1) compared with two symmetric price games, the total output effect of each firm is unchanged, but the total social welfare is reduced, and as the size of the strong market increases, the reduction effect of total social welfare increases first and then decreases; (2) from local social welfare analysis, although the output of the firm adopting price discrimination remains unchanged, it can produce more producer surplus, consumer surplus and social welfare third-degree; (3) while the firm that uses uniform pricing is at a disadvantage in competition, the local social welfare created by it is decreased, and the reduction effect of social welfare will increase first and then decrease as the increase of the size of the strong market occurs. These conclusions reveal in an oligopoly market why enterprises always choose price discrimination and the government acquiesces in the existence of price discrimination.

Keywords

• third-degree price discrimination
• duopoly market
• asymmetric price game
• social welfare