Industrial Organization: Contemporary Theory and Empirical Applications, 5th Edition

5

Price Discrimination and Monopoly: Linear Pricing

The standard definition of price discrimination is that a seller sells the same product to different buyers at different prices. Examples of price discrimination abound. Consider, for example, the market for prescription and generic drugs. Both casual and formal empirical evidence finds that brand name prescription drug prices are on average lower in Canada than in the United States. Table 5.1 demonstrates this with evidence from two recent studies, one by Skinner and Rovere (2008) and the other by Quon, Firszt, and Eisenberg (2005). While the precise drugs covered by each study differ somewhat, the basic conclusion in each is the same. US consumers pay between 24 percent and 57 percent more for prescription drugs on average than do their Canadian neighbors.

The case of prescription drugs is far from an isolated example. Passenger airline companies and hotel chains are past masters at what they euphemistically call “yield management,” as any frequent traveler can readily attest. In the great majority of business-to-business transactions, prices are arrived at through prolonged negotiation. Sophisticated travelers who visit the Grand Bazaar in Istanbul know that all prices are negotiable—and are typically lower if the traveler happens to be accompanied by a native of Istanbul who does the negotiating! Nearer to home, purchasing a pre-owned automobile usually involves equally intensive negotiation. In each of these cases of negotiated ...