Price Discrimination Bans on Dominant Firms

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

Research output: Working paperDiscussion paperOther research output

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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

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Price discrimination
Dominant firm
Profit
Market power
Authority
Welfare effects
Consumer surplus
Pricing

Keywords

  • dominant firms
  • price discrimination
  • competition policy
  • regulation

Cite this

Bouckaert, J. M. C., Degryse, H. A., & van Dijk, T. (2008). Price Discrimination Bans on Dominant Firms. (CentER Discussion Paper; Vol. 2008-3). Tilburg: Finance.
Bouckaert, J.M.C. ; Degryse, H.A. ; van Dijk, T. / Price Discrimination Bans on Dominant Firms. Tilburg : Finance, 2008. (CentER Discussion Paper).
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Bouckaert, JMC, Degryse, HA & van Dijk, T 2008 'Price Discrimination Bans on Dominant Firms' CentER Discussion Paper, vol. 2008-3, Finance, Tilburg.

Price Discrimination Bans on Dominant Firms. / Bouckaert, J.M.C.; Degryse, H.A.; van Dijk, T.

Tilburg : Finance, 2008. (CentER Discussion Paper; Vol. 2008-3).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Price Discrimination Bans on Dominant Firms

AU - Bouckaert, J.M.C.

AU - Degryse, H.A.

AU - van Dijk, T.

N1 - Pagination: 34

PY - 2008

Y1 - 2008

N2 - 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.

AB - 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.

KW - dominant firms

KW - price discrimination

KW - competition policy

KW - regulation

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BT - Price Discrimination Bans on Dominant Firms

PB - Finance

CY - Tilburg

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Bouckaert JMC, Degryse HA, van Dijk T. Price Discrimination Bans on Dominant Firms. Tilburg: Finance. 2008. (CentER Discussion Paper).