We analyze the welfare consequences of a monopolist having additional information about consumers’ tastes, beyond the prior distribution; the additional information can be used to charge diﬀerent prices to diﬀerent segments of the market, i.e., carry out “third degree price discrimination.” We show that the segmentation and pricing induced by the additional information can achieve every combination of consumer and producer surplus such that: (i) consumer surplus is non-negative, (ii) producer surplus is at least as high as proﬁts under the uniform monopoly price, and (iii) total surplus does not exceed the eﬀicient gains from trade. As well as characterizing the welfare impact of price discrimination, we examine the limits of how prices and quantities can change under price discrimination. We also examine the limits of price discrimination in richer environments with quantity discrimination and limited ability to segment the market.
Bergemann, Dirk; Brooks, Benjamin; and Morris, Stephen, "The Limits of Price Discrimination" (2013). Cowles Foundation Discussion Papers. 2272.