Revisiting the Relationship between Competition and Price Discrimination∗ Ambarish Chandraa;b Mara Ledermana June 7, 2017 a: University of Toronto, Rotman School of Management b: University of Toronto at Scarborough, Department of Management Abstract We revisit the relationship between competition and price discrimination. Theoretically, we show that, if consumers differ in terms of both their un- derlying willingness-to-pay and their brand loyalty, competition may increase price differences between some consumers while decreasing them between oth- ers. Empirically, we find that competition has little impact at the top or the bottom of the price distribution but a significant impact in the middle, thus increasing some price differentials but decreasing others. Our findings highlight the importance of understanding the relevant sources of consumer heterogeneity and can reconcile earlier conflicting findings. 1 Introduction Price discrimination occurs when firms charge different mark-ups to different con- sumers. While intuition might suggest that competition would limit a firm’s ability to price discriminate, it is well established that firms can price discriminate in non- monopoly settings. There is now a large theoretical literature on oligopoly price discrimination (for an extensive review, see Stole, 2007). There is also a growing body of empirical work that investigates how market structure impacts equilibrium outcomes under price discrimination. This empirical literature has developed along several tracks. One track investigates whether competition influences the type of price discrimination strategies firms use; ∗Corresponding author:
[email protected]. This research was supported by the Social Sciences and Humanities Research Council. Zhe Yuan provided excellent research assistance. We thank Heski Bar-Isaac, Ken Corts, Joshua Gans, Eugene Orlov, Christian Ruzzier and seminar participants at the Kellogg School of Management, the University of Toronto, the 2015 UBC Summer IO conference and the 2015 IIOC for helpful comments.