Third-Degree Price Discrimination with Buyer Power

Roman Inderst 1 , 1  and Tommaso Valletti 2 , 2
  • 1 University of Frankfurt and Imperial College London, inderst@finance.uni-frankfurt.de
  • 2 Imperial College London and University of Rome “Tor Vergata”, t.valletti@imperial.ac.uk

Abstract

This paper introduces a model of third-degree price discrimination where a seller's pricing power is constrained by buyers' outside options. Price uniformity performs more efficiently than discriminatory pricing, as uniform pricing allows weaker buyers to exploit the more attractive outside option of stronger buyers. This mechanism is markedly different from the mechanisms that are at work in case uniform pricing is imposed on an unconstrained monopolist.

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