Review of Industrial Organization
12: 417–438, 1997.
1997 Kluwer Academic Publishers. Printed in the Netherlands.
Spatial Price Discrimination: The Use of Parking
Coupons by Downtown Retailers
C. ROBIN LINDSEY and DOUGLAS S. WEST
Department of Economics, University of Alberta, Edmonton, Alberta T6G 2H4, Canada
Abstract. Price discrimination in monopolistically competitive markets affects ﬁrms’ joint proﬁts
through several pecuniary and nonpecuniary externalities. Discrimination is a public good if the net
effect is positive. Using a random utility shopping destination choice model we investigate the effect
of a downtown parking coupon program that discriminates in favor of suburban consumers and against
consumers based downtown. The program appears proﬁtable for downtown stores collectively, but in
the noncooperative Nash equilibrium stores do not participate. Participation is thus subject to free-
riding. As the subsidy rate required to induce participation rises, proﬁts fall. Whatever the subsidy
rate, social surplus declines.
Key words: Price discrimination, coupons, retailers, shopping center competition.
Third-degree price discrimination has been studied at least since Pigou (1920) and
Robinson (1933), and is subject to antitrust policy.
Price discrimination can have
positive or negative effects on total output and welfare (proﬁts plus Marshallian
consumers’ surplus), depending on the relative price elasticities and curvature of
demand curves in the relevant market segments.
Though typically analyzed for monopoly markets, it is now realized (e.g., Nor-
man, 1983; Borenstein, 1985; Holmes, 1989) that price discrimination can be
proﬁtable even in free-entry markets if product differentiation limits the cross-
price elasticity of demand between ﬁrms. In such markets price discrimination has
spillover effects between ﬁrms. This raises the possibility that ﬁrms can increase
their collective proﬁts by colluding, either to enhance the extent of price discrimi-
nation between market segments, or to restrict it, as the case may be. An insightful
analysis of this issue has recently been provided by Winter (1996). As he observes,
grocery stores often double or triple manufacturers’ coupons.If this practice erodes
For helpful comments we are grateful to Richard Arnott, Laura M. Beaulieu, Curt Eaton, Mark
Isaac, William Shepherd,twoanonymous referees and seminar participantsat SimonFraser University
and the University of Alberta. Thanks are also due to Ward Niou and Heather Romank for diligent
research assistance, and Randall Way and June Nicolay of the Downtown Business Association of
Edmonton for providing us with data. Financial support from the Central Research Fund of the
University of Alberta is gratefully acknowledged. The usual disclaimer applies.
Notable theoretical contributions include Schmalensee (1981), Katz (1984) and Varian (1985).