A Note on Pricing With Market Power : Third-Degree Price Discrimination With Quality-Differentiated Demand

The paper points up limitations in the standard undergraduate treatment of third-degree price discrimination by monopolists. While such treatments allude to qualitative distinctions between higher and lower priced alternatives, failure to capture those distinctions in underlying cost and demand structures can result in only partial and possibly misleading conclusions about the nature and consequences of price discrimination. Building on earlier work in the derivation of quality-differentiated demand (see SSRN 'https://ssrn.com/abstract=2576773' https://ssrn.com/abstract=2576773 and 'https://ssrn.com/abstract=3107103' https://ssrn.com/abstract=3107103), the paper compares the standard analysis of price discrimination with one that explicitly accounts for monopoly power in manipulating quality choices. The example provided illustrates the potential for substantially greater profits and greater efficiency losses by forcing some groups of consumers into suboptimal quality choices once quality variations are explicitly accounted for