A BEJTE Topics article.

Abstract

The paper examines under what conditions vertically differentiated duopolists engage in first-degree price discrimination. Each firm decides on a pricing regime at a first stage and sets prices at a second stage. The paper shows that when unit cost is an increasing and convex function of quality, the discriminatory regime is the unique subgame-perfect equilibrium of such two-stage game. In contrast to the case of horizontal differentiation, the discriminatory equilibrium is not necessarily Pareto-dominated by a bilateral commitment to uniform pricing. Also, the quality choices of perfectly discriminating duopolists are welfare maximizing. The paper explains why a threat of entry may elicit price discrimination by an incumbent monopolist.

Submitted: December 13, 2005 · Accepted: September 28, 2006 · Published: May 10, 2007

Recommended Citation

Encaoua, David and Hollander, Abraham (2007) "First-Degree Discrimination by a Duopoly: Pricing and Quality Choice," The B.E. Journal of Theoretical Economics: Vol. 7 : Iss. 1 (Topics), Article 14.
Available at: http://www.bepress.com/bejte/vol7/iss1/art14