The John M. Olin Center

Paper Abstract

276. Michael E. Levine, Price Discrimination Without Market Power, 2/00; subsequently published in Yale Journal on Regulation, Vol. 19, No. 1, Winter 2002, 1-36.

Abstract: Regulators and antitrust analysts have often used the presence of price discrimination as an indicator of market power. They are often motivated to regulate price-discriminating industries by political pressure from buyers facing the higher of the discriminatory prices. Their justification for doing so is provided by economic models that equate deviation from marginal cost with market power. Where costs are separable, this position may have validity. But most commonly, real-world goods and services are produced under conditions where costs, whether sunk costs like R&D or advertising or production or distribution costs like common facilities, are shared with other products. Under these usual conditions, firms constrained by competition from earning monopoly rents will adopt price discrimination as the optimum strategy to allocate common costs among buyers. Not only is this welfare enhancing (as Ramsey pricing suggests it is for monopolists), it is not evidence of the unilateral or collusive power to affect industry output, which is at the heart of the "monopoly power" or "market power" concepts. While some price discriminating sellers can earn monopoly rents, price discrimination alone is not evidence of market power and should not be used to justify regulatory intervention.

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