Title

Zone Pricing in Retail Oligopoly

Document Type

Discussion Paper

Publication Date

2-1-2017

CFDP Number

2079R2

CFDP Revision Date

December 2017, March 2018

CFDP Pages

48

Journal of Economic Literature (JEL) Code(s)

C13, L67, L81

Abstract

We quantify the welfare effects of zone pricing, or setting common prices across distinct markets, in retail oligopoly. Although monopolists can only increase profits by price discriminating, this need not be true when firms face competition. With novel data covering the retail home improvement industry, we find that Home Depot would benefit from finer pricing but that Lowe’s would prefer coarser pricing. Zone pricing softens competition in markets where firms compete, but it shields consumers from higher prices in rural markets, where firms might otherwise exercise market power. Overall, zone pricing produces higher consumer surplus than finer price discrimination does.

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