The Limits of Price Discrimination

We analyze the welfare consequences of a monopolist having addi-tional information about consumers ’ tastes, beyond the prior distri-bution; the additional information can be used to charge different prices to different segments of the market, i.e., carry out “third degree price discrimination. ” We show that the segmentation and pricing induced by the additional information can achieve every combina-tion of consumer and producer surplus such that: (i) consumer sur-plus is nonnegative, (ii) producer surplus is at least as high as profits under the uniform monopoly price, and (iii) total surplus does not exceed the surplus generated by efficient trade. (JEL D42, D83, L12) A classic issue in the economic analysis of monopoly is the impact of discrim-inatory pricing on consumer and producer surplus. A monopolist engages in third degree price discrimination if he uses additional information about consumer char-acteristics to offer different prices to different segments of the aggregate market. A large and important literature (reviewed below) examines the impact of particula