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When Is Price Discrimination Profitable?

Kellogg School of Management, Northwestern University, Evanston, Illinois 60208
Department of Economics and College of Business Administration, Northeastern University, Boston, Massachusetts 02115
eric-anderson{at}kellogg.northwestern.edu
j.dana{at}neu.edu

We consider a general model of monopoly price discrimination and characterize the conditions under which price discrimination is and is not profitable. We show that an important condition for profitable price discrimination is that the percentage change in surplus (i.e., consumers' total willingness to pay, less the firm's costs) associated with a product upgrade is increasing in consumers' willingness to pay. We refer to this as an increasing percentage differences condition and relate it to many known results in the marketing, economics, and operations management literatures.

Key Words: marketing; pricing; segmentation; economics; econometrics; price discrimination; segmented pricing; product line
History: Received: July 25, 2006; accepted: November 10, 2008.