Complementarity of willingness to pay and cost heterogeneity under vertical product differentiation: A welfare analysis

Torben Klarl

Journal of Evolutionary Economics, 2018, vol. 28, issue 3, No 6, 607 pages

Abstract: Abstract Due to the fact that a consumer’s willingness to pay differs between segments, many unregulated industries are price constrained, although the specific costs of market segments also differ. If the product quality is endogenously chosen, we find that third-degree price discrimination increases welfare if a sufficiently pronounced complementarity between the willingness to pay and variable cost heterogeneity is given. This is due to the fact that the monopolist’s incentive for employing a pronounced price dispersion strategy is directly influenced by the consumers’ willingness to pay for the quality of a product. With endogenous product quality, the paper shows that the standard welfare result of third-degree price discrimination compared to uniform monopoly pricing (e.g. that total welfare and consumer surplus both fall if total output does not rise) can be only reversed given the complementarity is sufficiently pronounced.

Keywords: Behavioral economics; Complementarity; Endogenous product quality; Third-degree price discrimination; Vertically differentiated products; Monopoly; Welfare (search for similar items in EconPapers)
JEL-codes: D42 L12 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s00191-017-0496-6

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