Price Discrimination with Differentiated Products: Definition and Identification

TLDR

Price discrimination with differentiated products lacks a consensus definition, with studies using either absolute price‑cost differences or percentage markups, and researchers are advised to report both measures due to the difficulty in determining the appropriate benchmark. The study proposes selecting a price‑discrimination criterion grounded in the market’s arbitrage cost. The analysis reveals that absolute and percentage criteria differ qualitatively, with each potentially flagging price discrimination when the other does not, and that any pricing above marginal cost triggers discrimination under at least one criterion.

Abstract

There is no widely accepted definition of price discrimination with differentiated products. Either absolute price‐cost differences or percentage price‐cost markups are used as benchmarks for comparison. I show that the two criteria are qualitatively different: One may indicate price discrimination when the other does not. Moreover, anything other than marginal cost pricing will be identified as price discrimination by at least one of the two. I propose choosing a criterion based on the cost of arbitrage in the market under examination. Because this is often difficult to determine, it is advisable to always report results with both measures.