Monopolistic Price Flexibility and Social Welfare: The Linear Case

We re-examine the case for uniform pricing in a monopolistic third-degree price-discrimination setting by introducing differentiated costs. Intuitively, the monopolist would like to use differentiated pricing also to decrease the average total cost, unless marginal costs are “perversely” correlated with demand elasticities. Indeed, monopolistic price differentiation can improve welfare and also aggregate consumer surplus even if, as in the benchmark linear case, total output does not increase. Accordingly, the welfare criterion based on total output fails and should be replaced by the computation of well-defined price indexes. These results pave the way for a more optimistic assessment of monopolistic pricing.