Competitive Price Discrimination in Asymmetric Oligopoly

Abstract Segmentation seldom results in symmetric market demands in the real world. We allow the demands in the segmented markets to exhibit asymmetric market characteristics across firms as well as markets, and study the effects of asymmetries on equilibrium prices and profits under price discrimination. Using a standard linear demand system for differentiated oligopolies, we show that both best-response symmetry and best-response asymmetry can arise—dependent on the parameter values. Distinguishing between inter-market and inter-firm parameter asymmetries, we find that the former is consequential in determining equilibrium price rankings as well as best-response (a)symmetries, while the latter controls the overall competitiveness of a segmented market and thus influences equilibrium profits. We also find that profits tend to increase with strong asymmetries, which results in enhanced profits with discrimination under the environments of best-response asymmetry. This result highlights the importance of a market expansion effect that is often overlooked in the best-response asymmetry literature that employs a unit-demand Hotelling structure.