The impacts of price discrimination on the differentiated industry

Abstract

This dissertation analyses the impact of price discrimination in a differentiated product market. Consumers are characterized by their locations over a characteristic space and their sensitivities toward the differentiated good. The consumer's utility function is of the Katz variety, defined in the form of U(x, y; θ), where x is the product variant characterized by the position of the characteristic space, y is an outside good, and θ is the level of sensitivity toward the differentiated good (product variant). Producers in an oligopolistically competitive market price discriminate consumers according to their level of sensitivity. It is shown that the pricing patterns (and consumers' preference between discriminatory and non-discriminatory pricing) depends on the level of fixed cost, the level of sensitivity, and most importantly the shape of the demand curves i.e., the type of utility function of the individual consumer. The classification of demand curves provides a clue for the so-called "perverse" result in pricing policies of differentiated products. It is also shown that under price discrimination the numbers of product varieties and the output of the industry increases while the output of individual firm decreases. Results under social welfare maximization are also derived and compared to the standard findings. In particular, it is shown that price discrimination provides "too many" varieties at a low fixed cost of production, but "too few" varieties under high fixed cost of production.