Uniform Pricing Versus Third-Degree Price Discrimination

Uniform Pricing Versus Third-Degree Price Discrimination

By Dirk Bergemann, Francisco Castro, Gabriel Weintraub
February 17,2020Working Paper No. 3860

We compare the revenue of the optimal third-degree price discrimination policy against a uniform pricing policy. A uniform pricing policy offers the same price to all segments of the market. Our main result establishes that for a broad class of third-degree price discrimination problems with concave revenue functions and common support, a uniform price is guaranteed to achieve one-half of the optimal monopoly profits. This revenue bound holds for any arbitrary number of segments and prices that the seller would use in case he would engage in third-degree price discrimination. We further establish that these conditions are tight and that a weakening of common support or concavity leads to arbitrarily poor revenue comparisons.