Market separation, negative consumption externalities and capacity constraints: when do consumers end better off?

Available from: 
October 2013
Paper author(s): 
Alvaro Bustos (Pontificia Universidad Catolica de Chile)
Financial Economics
Microeconomics - Competition - Productivity

Companies that offer services with capacity constraints in which there are negative consumption externalities (such as restaurants that serve smokers and non-smokers, airlines that fly passengers travelling with infants and without infants or organizers of sport events that serve aggressive and friendly supporters) tend to separate generators of the externality from receptors of the externality. Do consumers end better off with this type of separation? We show that: unless the number of consumers is small enough, as a net effect, consumers end worse off with separation than without it. The benefits enjoyed by the receptors because the externality disappears are dominated by the losses suffered by all consumers because prices go up. This is true even when the company doesn't price discriminate consumers. We first derive the results in the context of a monopoly that serves linear demands but later we test the robustness of our results for: different market structures, demand functions, variability in quality of service and variability in willingness to pay for service.


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Research section: 
Lacea 2013 annual meeting
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