Third degree price discrimination in imperfectly sealed markets

The conduct and the effects of 3rd-degree price discrimination in the presence of leakage are examined. Specifically, discriminatory solutions under leakage are compared to the discriminatory solution under perfect sealing and to the uniform pricing solution under simple monotony. The analysis indicates that the variety of outcomes possible under leakage that takes the form of market switching by buyers is far richer than previously assumed. The economic results of price discrimination hinge on how well the monopolist is able to seal markets. It is established that when unpreventable leakage to the low-price market is incorporated into the model, the outcome in imperfectly sealed markets may be more than merely a dilute version of the outcome in perfectly sealed markets. Intermediacy of outcome may fail in many ways to follow from intermediacy of discriminatory capability; in fact, it may be more profitable for the seller to put up with leakage than to stop it.