Price Discrimination and Efficient Distribution

• Published in: Southern economic journal Vol. 76; no. 2; pp. 500 - 512
• Main Authors: Beard, T. Randolph, Blair, Roger D., Kaserman, David L., Stern, Michael L.
• Format: Journal Article
• Language: English
• Published: College of Business Administration, University of Tennessee at Chattanooga, Chattanooga, TN 37403 Southern Economic Association 01.10.2009
• Subjects: Antitrust; Clayton Antitrust Act 1914-US; Consumer prices; Consumers; Cost efficiency; Discrimination; Economic competition; Economic efficiency; Economics; Efficiency; Efficient markets; Industrial organization; Monopolies; Petroleum products; Price discrimination; Price efficiency; Price theory; Prices; Prices and rates; Pricing; Retail industry; Retail stores; Suppliers; Wholesale prices; Wholesale trade
• ISSN: 0038-4038; 2325-8012
• DOI: 10.4284/sej.2009.76.2.500

This paper focuses on third-degree price discrimination by an upstream firm with some degree of monopoly power. Downstream firms fall into two categories: efficient and inefficient, according to their relative costs of transforming a unit of the upstream good into a unit of final product. Under ordinary static conditions, price discrimination favors the inefficient firms, which have more elastic demands. We consider, however, the possibility that discrimination in the opposite direction can alter the downstream market structure toward greater efficiency. Discriminatory pricing, then, involves charging a higher price to the less efficient firms. Such pricing is shown to be both potentially profitable for the upstream firm and welfare improving as average consumer prices fall.