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18-ABA Price Discrimination

18-ABA Price Discrimination - R Preston McAfee Price...

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465 Chapter20 _________________________ PRICEDISCRIMINATION R.PrestonMcAfee * Thischaptersetsouttherationaleforpricediscriminationanddiscussesthetwomajor forms of price discrimination. It then considers the welfare effects and antitrust implicationsofpricediscrimination. 1. Introduction TheWebsiteofcomputermanufacturerDellasksprospectivebuyerstodeclare whethertheyareahomeuser,smallbusiness,largebusinessorgovernmententity.Two yearsago,thepriceofa512MBmemorymodule,partnumberA0193405,dependedon whichbusinesssegmentonedeclared. Atthattime,Dellquoted$289.99foralarge business,$266.21foragovernmentagency,$275.49forahome,and$246.49fora smallbusiness. Whatexplainsthesepricedifferences? HowdoesDellbenefitfromit? Different segmentshavedifferentwillingnesstopay. Delloptimizesitsprices,offeringlower pricestorelativelyprice-sensitivesegments.AninterestingaspectofDell’sattemptto chargedifferentpricestodifferentcustomersisthatthecustomersaidDellinitseffort. AccordingtoaDellspokesperson,eachsegmentindependentlysetspricesandthe customerisfreetobuyfromwhicheverischeapest. Thus,thecustomerspayingmore arechoosingtopaymore,probablybecausetheydonotexpectthepricestovaryso significantly. Thischapterexplorestheeconomicrationaleforpricediscrimination. Section2 presentsthebasictheoryofpricediscriminationanddescribestheconditionsnecessary forpricediscriminationtoexist. Section3thendiscussesdirectpricediscrimination, whileindirectpricediscriminationisdiscussedinSection4. Section5providesa discussionofthewelfareeffectsassociatedwithpricediscrimination,whileSection6 concludes this chapter with a discussion of the antitrust implications of price discrimination. 2. Basictheoryofpricediscrimination Pricediscriminationcanexistwhenthreeconditionsaremet:consumersdifferin theirdemandsforagivengoodorservice,afirmhasmarketpower, 1 andthefirmcan preventorlimitarbitrage. Ifconsumershadidenticaldemandsforagood,thenall consumerswoulddemandthesameamountofthegoodforeachprice,andthepriceand * CaliforniaInstituteofTechnology . 1. “Marketpower”asusedinthischapterreferstotheeconomicdefinitionoftheterm,whichisthe abilitytopriceabovemarginalcost. See S TEVEN E.L ANDSBURG ,P RICE T HEORYAND A PPLICATIONS 329(6thed.2005);FranklinM.Fisher, DetectingMarketPower ,whichappearsasChapter14inthis book. R. Preston McAfee, Price Discrimination , in 1 I SSUES IN C OMPETITION L AW AND P OLICY 465 (ABA Section of Antitrust Law 2008)
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466 ISSUESINCOMPETITIONLAWANDPOLICY quantityofthegoodwoulddependonlyonthenumberofconsumersinthemarketand theabilityoffirmstosupplythegood(thesupplycurve). Iffirmshavenomarket power,thatis,noabilitytoaffectthepriceofthegoodstheysell,thetheoryofperfect competitionimpliesthatallgoodswouldbesoldatoneprice(thelawofoneprice). Finally,ifconsumerscanarbitragepricedifferences,anyattempttochargehigherprices tosomegroupwouldbedefeatedbyresale.
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