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- Title
The Effects of Third-Degree Price Discrimination in Oligopoly.
- Authors
Holmes, Thomas J.
- Abstract
Retail firms and restaurants commonly offer senior citizen discounts. One suspects this practice is not motivated by altruism. Rather, the behavior can be better explained as profit-maximizing price discrimination. These firms are setting a low price in a market which probably has high elasticity of demand. But why should the demand of senior citizens be more elastic than average? One possibility is that elderly people have below-average income and they would not eat out if restaurant prices were high. Perhaps a more plausible explanation is that retired people simply have more time on their hands to spend commuting across town to take advantage of discounts. The purpose of these discounts may then be to lure senior citizens away from other restaurants rather than to get them out of the house. Total industry output when the firms can discriminate between two markets is compared to what it would be if discrimination were impossible. Which regime has larger output depends on the sum of the "adjusted concavity condition" and the "elasticity-ratio condition." The first predominates when the rival products are poor substitutes and the firms have approximate monopoly power, while the second predominates at the other extreme where the products are close substitutes and the firms have almost no market power.
- Subjects
PRICE discrimination; OLIGOPOLIES; DUOPOLIES; PROFIT maximization; OLDER people; MARKETS; ECONOMICS
- Publication
American Economic Review, 1989, Vol 79, Issue 1, p244
- ISSN
0002-8282
- Publication type
Article