Francisco Galera

Quality differences, third-degree price discrimination, and welfare

We propose a theoretical model to analyze the welfare implications of price discrimination in the presence of differences in quality. The model considers two markets where in each market competition takes place between a local firm that operates in that market only and a global firm that operates in both markets. All firms are assumed to be producing with zero marginal costs. Local firms produce a good that is perceived by consumers to have superior quality than that produced by the global firm. We find that there are parameter values such that welfare increases while total output decreases if the global firm engages in price discrimination. This is due to a positive allocation effect brought about precisely by the global firm engaging in price discrimination.

Unit taxes and ad valorem taxes with vertically differentiated products

This article analyses a model in which a local monopolist that produces low-quality goods competes against a foreign competitive industry that produces a higher quality version of the goods. We use the model to analyse the welfare implications of introducing a unit tax on the local producer, relative to an ad valorem tax. We find parameter values for which the unit tax dominates the ad valorem tax, in the sense of increasing welfare while not reducing government revenues. This result contrasts with the mainstream results on the dominance of ad valorem over unit taxes.

Free to choose. A different answer to a known puzzle

Nalebuff (Journal of Economic Perspectives, 1(2), 157–63, 1987) proposes a puzzle and a standard solution to the mentioned puzzle based on Bayes theorem. After giving the standard solution to this problem, Professor Nalebuff asked: ‘Since many if not most individuals choose to stay with their original choice, does this suggest we should look for alternatives to Bayes rule?’ In this paper a right answer to that question is proportionated.