Does Price Discrimination Intensify Competition? Implications for Antitrust

Posted by Social Science Research Network

Does Price Discrimination Intensify Competition? Implications for Antitrust – James C. Cooper (George Mason University School of Law – Law & Economics Center), Luke Froeb (Vanderbilt University – Strategy and Business Economics), Daniel P. O’Brien (Federal Trade Commission – Bureau of Economics), Steven Tschantz (Vanderbilt University – Department of Mathematics)

ABSTRACT: As a general proposition, antitrust law is hostile to price discrimination. This hostility appears to derive from a comparison of perfect competition (with no price discrimination) to monopoly (with price discrimination). Importantly, economists have known for some time that some forms of price discrimination by oligopolists yield different welfare outcomes than price discrimination by a monopolist. This article focuses on the antitrust implications of price discrimination based on consumer location by spatial competitors that, in contrast to monopoly price discrimination, lowers prices for all consumers. In an important class of spatial models and many real world markets, the consumers to whom one firm would like to raise price – its strong market – are another firm’s weak market to which it would like to lower price. When this “best-response asymmetry” exists, the equilibrium outcome of spatial competitors reacting to each other’s discriminatory price reductions may be lower prices for all consumers and lower profits for all firms, compared to an equilibrium in which all firms offer uniform pricing to all consumers. We identify three areas of antitrust that could benefit from this economic insight: mergers of spatial competitors; the use of price discrimination to infer market power; and Robinson-Patman enforcement.