On The Welfare Effects Of Differential Pricing

The paper discusses the economic aspects of the most important questions (such as demand response or capacity allocation) related to differential pricing. First, we consider a revenue-neutral introduction of peak-load pricing. We examine under what circumstances does peak-load pricing lead to a Pareto improvement compared to uniform pricing. Second, we analyze what properties of customers make it profitable for a firm to introduce peak-load pricing. We find that on the supply side, incentives to introduce differential pricing may be technology-driven (i. e. high on-peak marginal costs) or demand-driven (i.e. low elasticity of substitution). Consumers benefit more if they can adopt to prices more flexibly. Innovative technology, such as smart meters, may help consumers benefit from real-time pricing. Such technology is expensive to install. This makes it necessary that consumers cover part of the costs. If they are myopic, or other effects of bounded rationality hinder their commitment, regulatory intervention might be needed to increase welfare. The more accessible enabling technology (price comparison websites, cheap smart meters etc.) will be, the more everyone will benefit from time-varying pricing.

This article examines the welfare effects of third-degree price discrimination under oligopolistic competition with horizontal product differentiation. We derive a necessary and sufficient condition for price discrimination to improve social welfare: the degree of substitution must be sufficiently greater in the “strong” market (where the discriminatory price is higher than the uniform price) than in the “weak” market (where it is lower). It is verified, however, that consumer surplus is never improved; social welfare improves solely owing to an increase in the firms' profits in the case of linear demands.

This paper assesses the welfare e⁄ects of rms ability to use data for group and personalized pricing in markets with unit ( q = 1) and multi-unit demand consumers ( q > 1). The disutility cost of not consuming the ideal good is a function of units purchased and can increase at a decreasing rate 2 [0 ; 1] as consumption increases (is the elasticity of the disutility cost with respect to q ): Group pricing (GP) and personalized pricing (PP) are compared to uniform pricing (UP). GP always boosts pro ts at the expense of consumers. When = 0 ; PP reduces industry pro ts and boosts consumer welfare. The same happens when q is low and/or is su¢ ciently high. In contrast, if heterogeneity in demand is su¢ ciently high and is su¢ ciently low, PP can enhance pro ts at the expense of consumer welfare.