Endogenous third-degree price discrimination in Hotelling model with elastic demand

Tong Zhang (), Yixue Huo (), Xin Zhang () and Jie Shuai
Additional contact information
Tong Zhang: South China Agricultural University
Yixue Huo: Zhongnan University of Economics and Law
Xin Zhang: Zhongnan University of Economics and Law

Journal of Economics, 2019, vol. 127, issue 2, No 2, 125-145

Abstract: Abstract We relax two common assumptions in the Hotelling model with third-degree price discrimination: inelastic demand and exogenously assumed price discrimination. Based on the constant elasticity of substitution representative consumer model, we allow firms to endogenously choose whether to acquire consumer information and price discriminate. We find that when the information cost is sufficiently low, there exist two symmetric sub-game perfect Nash equilibria irrespective of the demand elasticity: both firms acquiring information and price discriminating, and neither firm acquiring information and charging a uniform price. This implies that the widely discussed prisoners’ dilemma, in which both firms are exogenously assumed to price discriminate, is not in fact a dilemma. A comparison of social welfare shows that when the demand elasticity is large enough, price discrimination improves social welfare. This is in contrast to the finding—price discrimination harms social welfare—in the existing literature assuming perfect inelastic demand.

Keywords: Third-degree price discrimination; Hotelling model; Elasticity of demand; Welfare (search for similar items in EconPapers)
JEL-codes: D4 L1 R3 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://link.springer.com/10.1007/s00712-018-0635-z Abstract (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:127:y:2019:i:2:d:10.1007_s00712-018-0635-z

DOI: 10.1007/s00712-018-0635-z

Access Statistics for this article

Journal of Economics is currently edited by Giacomo Corneo

More articles in Journal of Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().