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19 Yale J. on Reg. 1 (2002)
Price Discrimination without Market Power

handle is hein.journals/yjor19 and id is 7 raw text is: Price Discrimination Without Market Power
Michael E. Levinet
Politicians, regulators and antitrust analysts have often used the
presence ofprice discrimination as an indicator of market power. They are
often motivated by political pressure from buyers facing the higher of the
discriminatory prices to regulate or to pursue antitrust remedies in price-
discriminating industries. Their justification for doing so is provided by
economic models that equate deviation from marginal cost with market
power. In the unusual case where costs are completely separable, this
position may have validity. But most commonly, real-world goods and
services are produced under conditions where costs (sunk or not) like
R&D, advertising or production or distribution costs like common
facilities, are shared with other products. Under these common conditions,
firms constrained by competition from earning monopoly rents will adopt
price discrimination as the optimum strategy to allocate common costs
among buyers. Not only is this very often welfare-enhancing (as Ramsey
pricing suggests it is for certain monopolists), it is not evidence of the
unilateral or collusive power to affect industry output, which is at the
heart of the monopoly power or market power concepts. A version of
price discrimination also can be used to recover sunk costs in a
competitive environment, thus providing a solution to the destructive
competition problem that has plagued regulatory economics from the late
nineteenth century to the late twentieth. This view of price discrimination
also helps to explain and justify network pricing behavior that has been
accused of being predatory. Price discrimination can, of course, be used to
facilitate and preserve the exercise of market power. But while some price
discriminating sellers can earn monopoly rents, price discrimination alone
is not evidence of market power and should not be used to justify
regulatory intervention.
Introduction  .......................................................................................... . .   2
I.   The Problem, Viewed   Historically  .................................................  3
II. Modem Developments of the Theory ............................................ 6
t    Harvard Law School. I am grateful to Richard Craswell, Einer Elhauge, David Friedman,
Andy Hansen, Henry Hansmann, Daniel Kasper, Louis Kaplow, Lewis Komhauser, Kristin Madison,
Ariel Pakes, Alan Schwartz, Matthew Spitzer and participants in workshops at Harvard, Yale, Stanford
and NYU for helpful comments on earlier drafts and presentations. Alan Schwartz was particularly
helpful on the issue of the uniqueness of the price equilibrium and, as noted, David Friedman supplied
an important example. Richard Craswell provided invaluable commentary on a wide variety of points.
Despite all this help, errors undoubtedly remain. Needless to say, no one else is willing to take
responsibility for them, so they are mine.

Copyright 0 2002 by Michael E. Levine

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