Essays on Price Discrimination

Abstract

This thesis explores the relationship between two empirical findings in the lit- erature on price discrimination; why different retailers offer different versions of a product, and how competition distorts the price schedule of a multi-version product. In chapter II, I examine whether a monopolist offering a single product in different container sizes alters that product’s price schedule when a new product is intro- duced. To assess the validity of this hypothesis, I use a model of second-degree price discrimination to show that the introduction of a new product does not distort the price schedule of an existing product. Using detailed, store-level data from the Dominick’s Fine Foods supermarket chain, I test the model’s prediction by investigating whether stores within this chain distort the prices of different sizes of a sport drink when they introduce a new sports drink. I find that a product release hampers the monopolist’s ability to distort the relative prices of a product’s adjacent container sizes. This result supports thehypothesis that new product introduction can explain both puzzles. Chapter III continues this investigation by relaxing the single-firm assumption, allowing competing firms to sell multiple versions of different products. The mail order catalog industry proves to be a useful setting in which to assess the relation- ship between price discrimination and competition. Because mailing lists are pure information goods, they have zero marginal costs. Hence, any price variation cannot be attributed to cost differences and must therefore be attributed to price discrimi- nation. The results indicate that increased competition is generally associated with an increased propensity to price discriminate. Further, list owners offer menus with more choices in more competitive markets. That is, not only are lists in more competitive segments more likely to price discriminate, they will also partition their consumers into finer subsets. These results, like those from chapter II, suggest that the relationship between price discrimination and the presence of close substitutes is largely dictated by con- sumer preference.