Friday, 21 October 2011: 9:10 AM
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. Our analysis also provides new results with constant elasticity demands.