Unformatted text preview: uese market is very small and/or demand is low,
however, a firm that is not allowed to price discriminate
may find it profitable to set p(D) everywhere.
Then banning price discrimination is welfare detrimental,
as profits of firms are reduced, Portuguese consumer
surplus reduced, German consumer surplus unchanged.
Price discrimination only reduces welfare if sold quantity
if not higher when compared to situation without price
9 Market Power UK motorcycle manufacturer Triumph is not allowed
(since 2000) to ban exports from Belgium and NL to UK.
(since It has 10% market share in UK, and 5% each in Belgium and NL.
Charged higher price in UK. Does it make sense to prohibit per se the prevention of
parallel exports in case of firms with little market power?
parallel Such practice of firm with little market share may have very little
effect in magnitude on welfare.
Firms that price discriminate gain higher profits, which may
trigger investment, and make them more competitive in the long
run. little reason to justify prohibition on welfare grounds
In EC, this is a political reason: citizens of different countries in
EC should get the same deal (single, integrated market idea)
10 Price discrimination as monopolisation device So
So far, we discussed effects of PD given
the structure of the market.
the Can it be used to change the structure? pre-empt entry force exit of competitors 11
11 Price discrimination as monopolisation device Imagine a monopolist produces a good, where
transportation cost matter
Located in centre of country, whose population is
concentrated around two cities (north/south)
Suppose a new competitor sets up plant in neighboring
country in the north.
Monopolist has incentive to charge higher price to
southern people than to northern ones.
Is it a problem?
Same reasoning as before: depends if nothern market
will be served in case of banning price differentiation.
12 Pricing Strategies: Predatory Pricing Low prices are typically associated with higher consumer
However, „too low“ prices may have anti-competitive
goals forcing rival to exit or pre-empting potential entry
llow prices improve welfare only in period of „predation“,
afterwards predator will increase prices, and welfare will be
harmed in long run
harmed „predatory pricing“: sacrifice profits in short run to
eliminate competition, and get high profits in long run
Identification of predation: short term loss, and existence
of market power by predator
Problem: what pricing strategy is lawful and competitive,
and which is predation, and thus unlawful?
13 Pricing Strategies: Predatory Pricing Larger firms typically charge lower prices due to
economies of scale or scope
However, predation occurred historically, but no rigorous
economic theory existed
Typically: „deep pocket“ argument llarge firm may start price war with small firm that results in
losses for both
but small firm has limited resources:
only „small pocket“
small firm will not be able to survive with losses for long time,
and will exit industry at some point.
llarge firm will increase prices and recoup...
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