Third-degree price discrimination revisited

Abstract

The author derives the probability that price discrimination improves social welfare, using a simple model of third-degree price discrimination assuming two independent linear demands. The probability that price discrimination raises social welfare increases as the preferences or incomes of consumer groups become more heterogeneous. He derives the average revenue curve of the price-discriminating monopoly, corresponding to its aggregated marginal revenue curve. The curve is non-linear and lies above the aggregated demand curve of simple monopoly. The results may be used to explain to students the effects of third-degree price discrimination on market outcomes.