http://worldcat.org/entity/work/id/135408761

Perfect price discrimination with costless arbitrage

The ability of a monopoly seller to prevent resale is often presented as a necessary condition for first degree and third degree price discrimination. In this paper, the authors explore this claim and show that, even with costless arbitrage markets, price discrimination may continue to be both feasible and profit maximising despite potential resale. With finite numbers of consumers, arbitrage markets may be?thin?, in the sense that there can be too few low-valuation consumers to supply high-valuation consumers. The paper examines both ex ante and ex post arbitrage markets and shows how a monopoly can exploit potential?thinness? to profitably price discriminate. In each case, the authors present sufficient conditions for equilibrium price discrimination. The paper also notes that the form of such discrimination depends on the nature of the arbitrage market, and considers business strategies that a monopoly might adopt to exacerbate market thinness. The results show how market depth and the effectiveness of arbitrage are the key elements for price discrimination, rather than the per se prevention of reselling. These pricing strategies are critically important in the efficient management of intellectual property.

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