Third-Degree Price / Discrimination in the Presence of Subsidies

In: German Economic Review, (2006) ; Nr. 7, S. 419 - 426
Zeitschriftenaufsatz / Fach: Wirtschaftswissenschaften
According to a classical result, a move from uniform pricing to third-degree price discrimination only improves welfare if total output increases. In this paper I show that the classical result fails in the presence of subsidies. This finding appears to be relevant for the pharmaceutical sector where a consumer pays a fraction of the actual drug price due to health insurance coverage.