Price Discrimination Bans on Dominant Firms

J.M.C. Bouckaert, H.A. Degryse, T. van Dijk

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Abstract

Competition authorities and regulatory agencies sometimes impose pricing restrictions on firms with substantial market power — the “dominant” firms. We analyze the welfare effects of a ban on behaviour-based price discrimination in a two-period setting where the market displays a competitive and a sheltered segment. A ban on “higher-prices-to-shelteredconsumers” decreases prices in the sheltered segment, relaxes competition in the competitive segment, increases the rival’s profits, and may harm the dominant firm’s profits. We show that a ban on “higher-prices-to-sheltered-consumers” increases the dominant firm’s share of the first-period market. A ban on “lower-prices-to-rival’s-customers” decreases prices in the competitive segment, lowers the rival’s profits, and augments the consumer surplus. In particular, while second-period competition is relaxed by a ban on “lower-prices-to-rival’scustomers”, first-period competition is intensified substantially, which leads to lower prices “on-average” over the two periods. Our findings indicate that a dynamic two-period analysis may lead to conclusions opposite to those drawn from a static one-period analysis.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages34
Volume2008-3
Publication statusPublished - 2008

Publication series

NameCentER Discussion Paper
Volume2008-3

Keywords

  • dominant firms
  • price discrimination
  • competition policy
  • regulation

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