A Note on the Effect of Price Discrimination on Entry

Does banning price discrimination promote entry? The answer to this question has important public policy ramifications. Banning price discrimination would be beneficial to consumers if doing so always promoted competition. It seems that an incumbent who is serving multiple markets is likely to respond more aggressively to entry in any given market if price discrimination is allowed than if it is prohibited, hence entry is less likely to occur when price discrimination is allowed. Following this argument, Armstrong and Vickers (1993) concluded that banning price discrimination tends to encourage entry. Despite the policy relevance of the question raised above, the literature on price discrimination has paid little attention to the issue (an exception is the afore-mentioned paper by Armstrong and Vickers (1993)). Armstrong and Vickers (1993) studied a model with a dominant firm serving two identical markets, one captive and the other facing possible competition from a price-taking entrant. In this note, we demonstrate that Armstrong and Vickers (1993) conclusion that price discrimination generally has a negative effect on entry is problematic. We have re-examined their results using the same model but with non-identical markets. By considering both the difference in the degree of