Journal Article The Noisy Monopolist: Imperfect Information, Price Dispersion and Price Discrimination Get access Steven Salop Steven Salop Federal Reserve Board Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 44, Issue 3, October 1977, Pages 393–406, https://doi.org/10.2307/2296898 Published: 01 October 1977 Article history Received: 01 April 1974 Accepted: 01 October 1976 Published: 01 October 1977

This paper shows that firms endowed with monopoly power can utilize an optional service contract form of guarantee as an instrument for effecting a surplus extracting two-part tariff. The monopolist finds it optimal to produce, guarantee and replace defective units, even if a zero defect rate could be achieved at no additional production cost. It is also shown that the price per unit is greater than the “effective” marginal cost; it may even be higher than the pure monopoly price. Moreover the monopolist is unable to extract all of the consumers surplus. Thus, that optional service contract policy can provide an effective yet defensible form of price discrimination as an alternative to possible illegal tie-ins, quantity discounts and simple two-part tariffs.

Steven Salop, Joseph Stiglitz; Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion, The Review of Economic Studies, Volume 44, Issue

A model of product differentiation which combines elements of both spatial and representative consumer formulations is used to examine the properties of single- and multiple-price equilibria. Conditions under which decreases in the intensity of consumer preferences reduce price are given. It is shown that, with certain types of demand curves, entry can eliminate price-cost markups even given product differentiation. If competition is localized, it is demonstrated that entry does not affect the markup. Finally, the effect of spurious product differentiation on price is examined.