Third-Degree Price Discrimination with Positive Welfare Effects

This paper revisits the classic question of the welfare effects of monopolistic price discrimination. Demand functions have the same maximum willingness to pay and differ in curvature. Two families of demand function satisfy a condition equivalent to the monotone likelihood ratio property, which implies that demand that is more convex is also more elastic. Discrimination raises social welfare when demand functions have constant curvatures below 1, and aggregate consumer surplus is increased if the demand functions are convex. Discrimination increases total output when inverse demand curvatures are constant and demands are log-concave, and social welfare rises if the demand functions are concave. The implications of non-monotonicity are also examined: ­­the level of marginal cost can determine the sign of the welfare effect of discrimination.