Welfare Effects of Third-Degree Price Discrimination: Ippolito Meets Schmalensee and Varian

Iñaki Aguirre
IKERLANAK, Working Paper Series IL 54/11.

Based on a pioneering work by Ippolito (1980) we construct a simple model which allows the welfare effects of third-degree price discrimination to be well understood and explained. The decomposition of the change in welfare into a misallocation effect and an output effect has advantages over the well-established analysis by Schmalensee (1981) and Varian (1985). In particular, our approach provides a graphic analysis which clarifies the welfare analysis of third-degree price discrimination.

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