Price Discrimination by a Mixed-Objective Firm

Abstract

We examine a firm maximizing a combination of profit and consumer surplus that engages in price discrimination between two groups under incomplete information about their willingness to pay. As the firm increases the weight placed on the consumer surplus of those demanding high-quality goods, the rent captured by this group increases. While this shift alters the price-quality bundle offered to consumers demanding low quality, it never increases their surplus. Importantly, the mixed objective function can enhance overall welfare, as the firm is more likely to serve both consumer groups rather than restrict sales to only the demanders of high quality.