Effects of spatial price discrimination on output, welfare, and location

Abstract

It is well recognized that the problem of price discrimination must address itself to the question of whether total output is greater or less under discriminatory monopoly than under simple monopoly. To answer this question Robinson advanced the criterion of "adjusted concavity' to decide whether price discrimination between two submarkets would increase or decrease total output if a monopolist were seeking maximum profits. Since then, a number of writers have extended and further revised her analysis. When the two demand curves are linear, discrimination does not change output, but, as demonstrated by Schmalensee in a linear case and generalized by Varian, welfare is reduced by allowing discrimination. The above analyses are examined in the context of traditional non-spatial economy in which distance costs are insignificant and negligible. Common to these writers is their basic assumption that the firm's location is predetermined. This assumption must be relaxed, however, insofar as location is an important variable and firms choose different locations under different pricing systems. In this paper, we will treat the location as an endogenous variable and study the effects of spatial price discrimination on output, welfare and location of a monopolist in the context of spatial economy. We will investigate the following issues: Will the Robinson output theorem and the Schmalensee welfare theorem be unscathed in a spatial economy, when the radius of the monopolist's market area is fixed while its location is a decision variable? What is the optimum location under discriminatory pricing compared with the one under f.o.b. mill pricing? -from Authors