When the Weak Become Weaker: The Effect of Market Power on Third Degree Price Discrimination

This study begins by exploring theoretically the relationship between market power and statistical price discrimination in a simple market setting. Most importantly, our theory predicts that market power accentuates the level of statistical discrimination in this setting. We test our theory using a natural field experiment that gains identification by taking advantage of a rare event in the memorabilia market—a good with an obscenity printed on it was mistakenly released into the marketplace. We find evidence consonant with the theoretical model: the degree of statistical discrimination is increasing in the level of market power. In this spirit, market power serves to considerably weaken those agents who are already at a competitive disadvantage in the market. As a control for potential confounds, we show the absence of such effects on the customer-side, even though customer-side discrimination is more intense than seller-side discrimination. These empirical results are important in not only a positive and normative sense, but also have clear policy implications