Price Discrimination ∗

In broad terms, one can say that price discrimination exists when two “similar” products which have the same marginal cost to produce are sold by a firm at different prices.1 This practice is often highly controversial in terms of its impact on both consumers and rivals. This chapter aims to explain some of the main economic motives for price discrimination, and to outline when this practice will have an adverse or beneficial effect on consumers, rivals and on total welfare. Broadly speaking, there are three main reasons why competition policy may be concerned with price discrimination. First, a dominant firm may “exploit” final consumers by means of price discrimination, with the result that total and/or consumer welfare are reduced. Here, the question that needs to be addressed is: in what circumstances does price discrimination by a dominant firm have an adverse effect on welfare? The answer to this, as will be clear in this survey, often depends on the welfare standard that guides the application of competition law. However, in practice competition authorities hardly ever concern themselves with price discrimination as an exploitative device. Second, and especially in Europe, it is sometimes a policy objective to attain a “single market” across the region. Arguably, one manifestation of a single market is that a firm does not set different prices in different regions, or at least it does not prevent arbitrageurs