Price discrimination over space — Theory, assumptions, and a case example

Abstract

Under discriminatory pricing, the firm's marginal revenue is equated with its marginal cost at each market point in the space economy. This pricing practice is more profitable than the f. o.b. pricing schedule which involves equality of aggregate marginal revenue and marginal cost. From this departure point, the present paper determines the effect on the theory of spatial price discrimination of homogeneous and heterogeneous local demand schedules and different degrees of competition over economic space. By relaxing the customary assumptions of homogeneity and assuming varying levels of competition, better explanations of spatial pricing policies obtain. A case study is also presented to indicate the importance of the alternative assumptions made in spatial price discriminating theory. It is shown that different demand schedules and varying levels of competition tend to promote discriminatory prices over economic space.