Issues in Price Discrimination: Reply.

• Author: Carroll, Kathleen
• Position: Reply to the comment on our paper by T. Jeitschko

Kathleen Carroll [*]

Dennis Coatest [+]

In reply to the comment on our paper by T. Jeitschko, we make the following five points. First, in the figure in our original paper the total marginal revenue curve ([MR.sub.[tau]]) is incorrectly drawn. We thank Professor Jeitschko for catching this error. Fortunately, the diagrammatic error did not affect any of our numerical results as reported in the original paper.

Second, Jeitschko claims that the computations in our numerical example are incorrect, owing to an incorrect statement of the market demand curve, and provides an alternative numerical example. In fact, he is correct that we did not write the market demand curve as piecewise linear as he does in his comment. However, given that marginal cost is constant at $20, in our example the only relevant portion of the market demand curve in determining the competitive equilibrium is the linear segment of demand that we report. In other words, that we did not write the demand as piecewise linear has no bearing on the results we show in the paper. Professor Jeitschko also states that a "discrepancy between total welfare under perfect competition and first-degree price discrimination appears in the results." In fact, there is a typographical error that we missed showing a discrepancy of $0.25; welfare under first-degree discrimination appears as $275.25 when it should have read $275. We thank Professor Jeitschko for catc hing this typographical error. However, we emphasize that the computations in his comment on our paper are simply an alternative numerical example to ours, not a correction of our results.

Third, in our discussion of first- and second-degree price discrimination in our original paper we do not specify precisely the way in which elasticities must differ and how this is shown in these cases. Neither does Jeitschko in his comment. We do state, however, that the ability to first-degree price discriminate rests with a consumer having different willingness to pay for different units of the good. A utility-maximizing consumer, having a lower marginal value for each additional unit, will be induced to purchase additional units only if the price falls accordingly. In demand theory, to charge a higher price on the first unit than on the second requires that the demand curve be downward sloping, which, except for the case of a constant elasticity demand function, implies different price elasticity values along the demand curve. The constant...