Third-degree price discrimination, consumption externalities and social welfare

This paper analyses monopolistic third-degree price discrimination in the presence of consumption externalities within two separate markets. Assuming linear inverse demands, we investigate an associated change in social welfare (the sum of the consumers' surpluses and the producer's profit) with the regime change from uniform pricing to price discrimination when both markets are open under either regime. It is shown that social welfare can improve even if total output is unaffected by the regime change. Moreover, it is possible that the sum of the consumers' surpluses also increases.