Title: The Welfare Effects of Spatial Price Discrimination
Abstract:In a recent article in this Review, M. L. Greenhut and H. Ohta (G-O) demonstrated that a spatial monopolist who adopts a spatially discriminating price would produce a larger output than under a mill ...In a recent article in this Review, M. L. Greenhut and H. Ohta (G-O) demonstrated that a spatial monopolist who adopts a spatially discriminating price would produce a larger output than under a mill price policy. They raise, without elaboration, the possibility that this larger output corresponds to a greater level of net benefits. The purpose of this paper is to examine a model in which the net benefits of both price policies can be measured and to extend the discussion to the case of competition for market areas-called spatial monopolistic competition in location theory (see Martin Beckmann 1968, 1970, 1971). Section I introduces a model, somewhat simpler than that of G-O, in which the basic result of G-O can be derived and the welfare effects of the two policies can be measured. Here it is found that when there is no significant competition for the firm's market area, spatial price discrimination results in firms producing larger output, serving larger market areas, and promoting greater net benefits than under a mill price policy. Section II then considers spatial monopolistic competition in which extra normal profits invite invasion of market areas. It is shown that the equilibrium firm output and market area will be smaller under spatial price discrimination than under mill pricing and that if price discrimination is allowed, firms will be forced by free entry to adopt that policy. It is also shown that customers buy more when spatial price discrimination is imposed than under mill pricing, but that they are worse off-greater net benefits are derived under mill pricing.Read More
Publication Year: 1975
Publication Date: 1975-01-01
Language: en
Type: article
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Cited By Count: 103
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