Uniform pricing and product innovation

We consider the rationale for imposing uniform pricing (UP) on a monopolist in a two-market model with endogenous quality. In contrast to the literature, we find that UP may yield higher quality than third-degree price discrimination (PD). This occurs when the demand dispersion between markets is sufficiently decreasing with quality. A simple test for a higher quality under UP is to check whether an increase in quality reduces the price differential between markets under PD. In this case, a higher quality under UP is an effective substitute for PD to extract consumer surplus. When the demand dispersion is small enough, a higher quality under UP increases social welfare relative to PD.