Welfare Effect of Behavior-Based Handset Subsidy Discrimination
Posted: 22 Mar 2015 Last revised: 23 Mar 2015
Date Written: June 30, 2014
Abstract
In this paper, we analyze the economic effects of behavior-based handset subsidy discrimination. Many of the previous literature analyze symmetric duopoly markets using Hotelling’s linear city model and show that price discrimination reduces social welfare. However, we use Salop’s circular city model to consider a more realistic market in which three firms with asymmetric costs and benefits compete. By analyzing the steady state of this market, we derive more meaningful conclusion about the effect of handset subsidy discrimination by two firms on market share and welfare. To be more specific, the discrimination always raises social welfare and consumer surplus and lowers profits. Therefore, we get a policy implication that banning the behavior-based handset subsidy discrimination is not desirable.
Keywords: Behavior-based handset subsidy discrimination, Steady state, Market share, Social welfare, Circular city model
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