Monopolistic Competition, Price Discrimination and Welfare

This paper studies third degree price discrimination in a monopolistically competitive market. When the number of firms is fixed, price discrimination raises firm profit and reduces consumer welfare relative to uniform pricing. In the long run, the equilibrium product variety under price discrimination is always excessive compared with the social optimum, whereas under uniform pricing there may be too few. Except when, under rare circumstances, uniform pricing causes too little entry, a ban on price discrimination leads to enhanced consumer and social welfare