SFB 303 Discussion Paper No. B - 92

Author: Ginsburgh, Victor, Bentley MacLeod, and Shlomo Weber
Title: Price Discrimination and Product Line Rivalry
Abstract: We introduce a model of oligopolistic price setting in which products are characterized by both style and quality. Producers are identified by a style, unique to their product line and a range of qualities, and are to price discriminate among consumers using quality. We study the properties of the equilibrium for this model and show, in contrast to Mussa and Rosen's work on the discriminating monopolist, that firms do not necessarily extract the most surplus from consumers of low quality products. The amount of surplus extracted as a function of quality will depend on the underlying demand parameters. The model is then used as the basis for estimating the pricing strategies of firms in the European automobile market. We find that the level of price discrimination varies greatly from country to country. More surprisingly, we find that the quality parameter that firms use to discriminate among consumers appears to be engine capacity. This may explain why engine capacity seems to be the only technical characteristic of the car that is often prominently displayed on the vehicle.
Creation-Date: February 1988
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