Rev Ind Organ (2017) 50:91–103

DOI 10.1007/s11151-016-9530-3

Parking Discounts: Price Discrimination with Different

Marginal Costs

Daniel Flores1 • Vitaliy Kalashnikov1

Published online: 29 June 2016

 Springer Science+Business Media New York 2016

Abstract This paper studies the problem of a monopolist that produces a certain
good and faces two types of customers: drivers and pedestrians. Drivers need
parking, while pedestrians do not. Therefore, drivers represent a higher marginal
cost for the firm. Among other things, this paper explains the conditions that make
parking discounts worthwhile in terms of profits and welfare. Free parking can be
socially optimal if two conditions are satisfied: The demand for the good by
pedestrians is more concave than is the demand by drivers; and the cost of parking is
relatively low.

Keywords Parking  Price discrimination  Welfare

JEL Classification L110

1 Introduction

The lack of complimentary parking is easy to understand when parking costs are
very high. For instance, parking in downtown New York for a few hours can cost as
much as $50. A shop or restaurant cannot offer to absorb the cost of these
expenditures if customers purchase on average $20 in merchandise or food,
respectively. However, it is not straightforward to explain why some firms provide

& Daniel Flores

daniel.florescr@uanl.edu.mx; danflore_mx@yahoo.com.mx
Vitaliy Kalashnikov
vitaliy.kalashnikov@uanl.edu.mx; kalashnikov_de@yahoo.de
1
Facultad de Economı́a, Universidad Autónoma de Nuevo León, Ave. Lázaro Cárdenas 4600
Ote., Frac. Residencial Las Torres, CP. 64930 Monterrey, Nuevo León, Mexico

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92 D. Flores, V. Kalashnikov

complimentary parking and others do not when the cost of parking is only $1 or $2
per hour in the immediate area.
In this paper, we model the problem of an urban merchant that should decide
whether to provide reduced price parking to its customers or not. Although the
merchant is a monopolist in the market for a certain good, it is not the unique
provider of parking. Indeed, the market for parking is competitive. Unlike previous
work that considers the provision of parking in suburban shopping malls where most
customers come by car, we assume that the firm faces two relevant groups of
customers: drivers and pedestrians. Drivers require parking in order to purchase the
good from the monopolist. In contrast, pedestrians do not require parking to
purchase from the monopolist.
Given that the merchant can’t distinguish between drivers and pedestrians until
drivers ask for parking reimbursement, it charges both groups the same price for the
good. However, the merchant can try to price discriminate between them through a
parking discount if the merchant benefits from charging drivers a lower price than it
charges to the pedestrians.1 It is not clear whether this is generally the case. On the
one hand, drivers may be willing to pay more for the good because they have high
incomes. On the other hand, pedestrians may be willing to pay more because they
are less mobile.
The problem that we study is common in many other contexts. That is, our
analysis extends to other situations in which a firm sells a main good and offers an
additional service that is required only by some of the customers. For example, we
can think of car repair shops that offer transportation; restaurants that provide
babysitting; hotels that provide Wi-Fi signals; electrical appliance shops that offer
equipment installation; or more generally shops that charge the same price to
customers that pay with cards or with cash.2
This article contributes to the understanding of these situations in several ways:
First, we believe that this is the first article that shows that price discrimination can
explain free or reduced price parking in urban shopping centers. Second, this article
extends the recent work of Chen and Schwartz (2015) on third-degree price
discrimination with different marginal costs and applies it to the study of parking
fees. Third, the article addresses a policy question: Should local governments
regulate or prohibit parking charges in commercial establishments? Proposals to
prohibit parking charges have been sent to congress recently in Latin American
cities such as Monterrey and Panama.3

1
The merchant can advertise the parking discount, and regular customers will expect it. Therefore, we
can assume that drivers take into account the parking rebate when deciding whether to shop (or not) with
the monopolist.
2
Murphy and Ott (1977) consider that equal charges when the customer pays with cash or with a credit
card is a form of price discrimination. More recently, Briglevics and Shy (2014) explain the incentives of
merchants to offer (or not) price discounts to customers that use less costly payment methods: cash or
debit cards, instead of credit cards.
3
See the newspaper articles of Ochoa (2013) and Vega (2015) for more details about the proposals to
make free parking mandatory in Monterrey and Panama, respectively.

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Parking Discounts: Price Discrimination with Different… 93

2 Review of the Literature

Parking has been widely studied in the context of transportation and urban
economics. As explained by Ommeren et al. (2011), a large body of economic
literature argues in favor of local governments’ charging for on-street parking and
letting the market provide off-street parking. Among other things, these articles
highlight that on-street parking is costly and generates negative externalities, such
as traffic congestion and pollution. Although this literature is relatively new, the
distortions generated by underpriced on-street parking resemble the ones that are
caused by a minimum wage in the Harris and Todaro (1970) model.
Recent articles by Dilek and Top (2013) and Hasker and Inci (2014) study the
provision of parking at shopping malls. Dilek and Top (2013) elaborate on the
reasons that motivate mall managers either to charge for parking or to provide it for
free. On the other hand, Hasker and Inci (2014) develop a model that takes into
account that shopping and parking are complements from the consumer’s
perspective. In contrast with the transportation literature, they conclude that
suburban shopping malls should provide free parking and argue in favor of
minimum parking requirements on efficiency grounds.4
Our work is related to the literature on third-degree price discrimination: We use
some of the results and techniques developed by Schmalensee (1981) and Aguirre
et al. (2010). However, our work is closer to Bertoletti (2009) and Chen and
Schwartz (2015). In a sense, it is a special case of the problem that is studied by
Chen and Schwartz (2015) where a monopolist price discriminates between two
groups that are represented by different demand functions and marginal costs.
Unlike their model where the firm sets different prices for the two groups without
any constraints, we consider a model where the price difference between the groups
is constrained–by the availability of competitive parking–not to exceed the cost of
parking.
Reduced price parking resembles pricing practices in two-sided markets. As
Rysman (2009) explains, in this type of market it is common to observe prices
below marginal cost or even zero.5 In two-sided markets, an intermediary–such as a
newspaper or a credit card company—provides services to two groups of customers
that complement each other. For instance, a newspaper serves readers and
advertisers, while a credit card company serves consumers and merchants.6
However, demand complementarities do not explain reduced price parking in our
model. The demands of drivers and pedestrians are independent but connected
because the firm sets a uniform price. Reduced price parking is then generated by
incentives to price discriminate between drivers and pedestrians.

4
Their model involves only drivers who have a unit demand for the merchant’s good but who are risk
averse and may not find what they want at the store. The provision of free parking mitigates the
consumer’s loss from not finding what they want and thus acts as a type of insurance policy.
5
A similar result is obtained by Davis and Murphy (2000). They show that a monopolist that sells two
complementary goods may have incentives to set a negative or zero price in one of the markets.
6
Hasker and Inci (2014) explain that shopping malls are intermediaries between stores and consumers.

123
94 D. Flores, V. Kalashnikov

3 Model

A monopolist merchant produces a certain good at constant marginal cost c [ 0 and

sells it at a price p [ 0. As mentioned before, the firm faces two types of customers:
pedestrians and drivers. Let q0 ð pÞ denote the demand of pedestrians for this good.
Similarly, let q1 ðp þ xÞ denote the demand of drivers for the good considering that
x  0 are the parking fees that they pay. For the sake of simplicity, assume that
individuals require at most one unit of the good.7 Therefore, every point on either
demand function represents a potential customer for the firm. Finally, let pm 0 and p1
m

denote
  choke prices  min
 the pedestrians’ and drivers’ markets, respectively (i.e.,
q0 pm 0 ¼ 0 and q 1 1 ¼ 0).
p
As an extension, we will consider that some drivers buy multiple units of the
good. Let qk ðkp þ xÞ denote the demand function of individuals who buy k units of
the good and use a parking space. For instance, consider singles (k = 1) and couples
(k = 2) attending a movie theater by car. Both groups require one parking space but
singles buy only one ticket while couples buy two tickets for the movie. Couples are
similar to pedestrians in the sense that they use parking space less intensively than
do singles. Therefore, we can say more generally that parking discounts
discriminate against customers that do not use parking or use it less intensively
than others.
As explained before, an important distinction between our model and the one that
is developed by Chen and Schwartz (2015) is that we assume a competitive market
for parking. Let cs [ 0 denote the marginal cost = market price of parking. The
merchant cannot charge drivers for parking above the market price. Drivers could
use alternative parking lots in order to avoid any extra charge. Assume also that the
firm cannot give additional discounts to drivers beyond providing them with free
parking: Perhaps this type of additional discrimination that is less obviously linked
to the specific needs of the drivers would create substantial unhappiness among the
pedestrians. Furthermore, with larger discounts pedestrians could try to arbitrage by
offering free parking to non-customers. They would obtain the price discount while
non-customers would obtain free parking. It follows then that 0  x  cs .8
We will assume that the demand functions satisfy certain properties. First, the
functions have negative slopes (i.e., q00  dqdp0 \0 and q01  oqop1 ¼ oqox1 \0). Second, the
functions can be concave, linear, or convex but not concave at some points and
linear or convex at others (i.e., the sign of the second derivatives q000  ddpq20 and
2

q001  oopq21 ¼ opox

2
o2 q1
should not change within the domains of the demand functions).
00 00
Third, let r0  qq00o and r1  qq101 be measures of curvature or concavity of the demand
functions of drivers and pedestrians, respectively.9 Assume that the sign of r1  r0
7
Hasker and Inci (2014) make the same assumption and say this is standard in Industrial Organization.
This assumption is reasonable for certain goods like electric appliances, cars or haircuts. As Belleflamme
and Peitz (2010) say, most consumers do not buy more than one unit of these products at a given point in
time.
8
In principle, pedestrians could also try to arbitrage if the monopolist offers reduced price parking.
However, in practice this is less likely to occur due to bargaining and transaction costs.
9
This measure is analogous to the Arrow–Pratt measure of absolute risk aversion.

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Parking Discounts: Price Discrimination with Different… 95

does not change along the demand curves. In other words, if one of the functions is
more concave (or convex) than the other, then it will be more concave (or convex)
than the other at all relevant points.
There are many combinations of standard demand functions that satisfy the three
conditions above. For example, consider the set of functions of the form qi ¼
ai  bi  pci with the assumption that all parameters are strictly positive. It is easy to
see that these functions have negative slopes. It is also easy to note that the
curvature or concavity of the demands of drivers and pedestrians are r0 ¼ c0p1 and
1 1
r1 ¼ cpþx , respectively. Therefore, these demands are concave, linear, or convex
along the entire function depending on the signs of parameters c0 and c1 ,
respectively. Moreover, the sign of r1  r0 does not change as we consider different
parking charges as long as c0 and c1 are sufficiently different from each other.
Finally, assume that demand functions and costs are such that the firm benefits
from serving both drivers and pedestrians at any x 2 ½0; cs . This implies that the two
markets are profitable. Therefore, the following conditions must be satisfied:
q0 ð pÞ [ 0, q1 ðp þ xÞ [ 0 and p  c þ x  cs [ 0. Note that marginal production
and parking costs c and cs , respectively, should be relatively small in comparison to
choke prices pm m
0 and p1 . Given that we are interested in the profitability of offering
free parking, define cm s [ 0 as the parking cost that makes the drivers’ market
unprofitable at x ¼ 0. Geometrically, the choke price in the drivers’ market is
c þ cm m
s ¼ p1 . We assume that cs \cs .
m

The problem of the monopolist is to choose p and x in order to maximize

pðp; xÞ ¼ p0 ð pÞ þ p1 ðp; xÞ ¼ ðp  cÞ  q0 ð pÞ þ ðp  c þ x  cs Þ  q1 ðp þ xÞ ð1Þ
subject to the constraint 0  x  cs .10 This function sums profits from drivers’ and
pedestrians’ markets. Note that the monopolist provides free parking at x ¼ 0 and
charges the full cost of parking at x ¼ cs . All the values of x between these extreme
cases represent scenarios where the firm partially refunds parking expenses to
customers. Equation (1) is similar to the profits function in Aguirre et al. (2010),
where the monopolist faces a discrimination constraint. However, in our paper the
constraint arises naturally because the monopolist can only use parking courtesy to
discriminate in favor of drivers.
For a given x, the necessary condition for profit maximization is
p00 þ p01 ¼ ðp  cÞ  q00 þ q0 þ ðp  c þ x  cs Þ  q01 þ q1 ¼ 0: ð2Þ
Suppose that the profit functions in both markets are strictly concave. That is,
p000 ¼ ðp  cÞ  q000 þ 2q00 \0 and ð3Þ

p001 ¼ ðp  c þ x  cs Þ  q001 þ 2q01 \0; respectively: ð4Þ

Finally, let pð xÞ be the price that solves Eq. (2) as a function of x, while p0 and p1
solve p00 ¼ 0 and p01 ¼ 0, respectively, at x ¼ 0.

10
A monopolist that sells to two groups of drivers that consume 1 and k units of the good, respectively,
maximizes ðkp  kc þ x  cs Þqk ðkp þ xÞ þ ðp  c þ x  cs Þq1 ðp þ xÞ.

123
96 D. Flores, V. Kalashnikov

Following the terminology in Robinson (1933), suppose that one market is weak
and the other one is strong. The idea is straightforward: If the monopolist is allowed
to set different prices in the two markets, it would normally charge a higher price in
one of the markets. This market is defined as ‘‘strong’’, and the other one is defined
as ‘‘weak’’.11 For instance, if two groups of consumers represent the same marginal
costs but their demands differ, then the market with more inelastic demand would be
strong and the other one weak. In the context of our problem, we will say that the
driver market is weak (or strong) and the pedestrian market is strong (or weak) if
p1 \p0 (alternatively, p1 [ p0 ).

4 Price

In this section, we study the effects of parking charges on the price of the main
good. As intuition suggests, a firm that provides reduced price parking covers at
least part of this cost by increasing the price of the good. Clearly, reduced price
parking benefits drivers but damages pedestrians. This idea is expressed formally as
follows.
Proposition 1 Compared to charging fully for parking, if the firm absorbs part of
the cost of parking ( 0\x\cs ), the price of the good will rise but less than fully (
1\dpdxðxÞ\0).
Proof Differentiate implicitly Eq. (2) with respect to x in order to find ðp  cÞ
 00 dp   dp 
q000  dp 0 dp 00 0 0
dx þ 2q0  dx þ ðp  c þ x  cs Þ q1  dx þ q1 þ q1  2 dx þ 1 þ q1 ¼ 0.

dp dp ðpcþxc Þq00 2q0

s p00
Solve for dx to find dx ¼ ðpcÞq00 þ2q0 þðpcþxc
1 1
00
s Þq þ2q
0 ¼ p00 þp00 .
1
0 0 1 1 0 1

It follows from (3) and (4) that 1\dpdxðxÞ\0. h

We can provide an intuitive explanation of this result. Suppose that the firm
charges drivers the full cost of parking. The profit functions are individually strictly
concave. If optimal prices in the two markets differ (assume that p1 [ p0 ) and the
constraint is binding (i.e., p1  p0 [ cs ), then the optimal price, pðcs Þ, will lie
between them. Reduce the parking fee by an arbitrarily small e [ 0 and at the same
time increase the price of the good by e [ 0. This leaves marginal profits in the
drivers’ market unchanged. However, marginal profits in the pedestrians’ market are
strictly lower because the price is further away from p0 . Therefore, the price is no
longer optimal (p00 þ p01 \0), and the firm would benefit by reducing it (that is,
increasing the price by less than e).
This pricing result is not new: For instance, Schwartz and Vincent (2006) come
to similar conclusions in the context of card payment networks under the ‘‘no
surcharge’’ rule. An increase in the fee that is charged to the merchant by a card
network leads the merchant to increase the uniform price by less than the fee
increase. However, it is interesting to obtain this result in the context of parking.
11
In Schmalensee (1981) and Aguirre et al. (2010), the monopolist increases the price in the strong
market and reduces it in the weak market when the discrimination constraint is relaxed. In our model, this
is not necessarily the case.

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Parking Discounts: Price Discrimination with Different… 97

Proposition 1 still holds if all customers are drivers but we have two groups, one that
buys a single unit of the good and other that buys k units of the good (i.e.,
p001 þ p00k
1

dx ¼  p001 þp00k ). Nevertheless, if we assume [as do Hasker and Inci (2014)] that all
dp k

customers are drivers and buy one unit of the good, then the firm fully reflects
p001
parking costs changes in the price of the good (i.e., dp dx ¼ p001 ¼ 1).

As long as we have two groups that use parking with different intensities, free or
reduced price parking distorts the allocation of goods between them. At equal
prices, the marginal valuations of the goods would be equal, but the marginal cost of
serving one group is higher than the other. Therefore, when the firm provides free
parking the group that uses parking more intensively consumes more of the good
and the other group less of the good in comparison to an efficient allocation. This
distortion is partially eliminated by reduced-price parking and completely
eliminated by full-price parking.

5 Profits

There are relatively simple reasons that explain why some firms provide free
parking. For example, a firm may provide free parking because there is plenty of
free parking in the area or because charging for parking involves important fixed
costs.12 Although these may be the relevant explanations of free parking in many
cases, we will study parking discounts (of which free parking is an extreme case)
that are driven by price discrimination motives on the assumption that parking is
costly (that is, it has an opportunity cost).
Define p ð xÞ ¼ p0 ðpð xÞÞ þ p1 ðpð xÞ; xÞ as the maximized profits of the monop-
olist. In order to evaluate the benefits of providing reduced price parking, consider
the derivative of maximized profits with respect to x. That is,
   
op 0 dp dp 0 dp 0 dp
¼ ðp  cÞq0  þ q0  þ ðp  c þ x  cs Þ q1  þ q1 þ q1 þ1 :
ox dx dx dx dx
ð5Þ
Then the envelope theorem implies that
op
¼ ðp  c þ x  cs Þq01 þ q1 ¼ p01 : ð6Þ
ox
An optimal price choice for the main good, as expressed in Eq. (2), requires that
p00 þ p01 ¼ 0. However, this condition is satisfied under three scenarios: p00 \0 and
p01 [ 0; p00 ¼ p01 ¼ 0; or p00 [ 0 and p01 \0. Therefore, it is not clear in general
whether the firm benefits by providing free parking, reduced-price parking, or full-
price parking. This idea is formally expressed as follows.

12
As suggested by Shoup (1999), the abundance of free parking spaces could be a consequence of
minimum parking requirements.

123
98 D. Flores, V. Kalashnikov

Proposition 2 The firm maximizes profits by offering: (i) free parking if drivers
are the weak market (i.e., p1  p0 \0); (ii) reduced-price parking if drivers are the
strong market and the marginal cost of parking is sufficiently high (i.e.,
0\p1  p0 \cs ); or (iii) full-price parking if drivers are the strong market and
the marginal cost of parking is sufficiently low (i.e., p1  p0  cs ).
Proof Suppose that drivers are the weak market (i.e., p1 \pð0Þ\p0 ). This implies
that p01 \0 at x ¼ 0. The concavity of the profits function, Eq. (6), and the fact that
x 2 ½0; cs  imply that x ¼ 0 is optimal. This proves (i). Suppose now that drivers are
the strong market (i.e., p1 [ pð0Þ [ p0 ). This implies that p01 [ 0 at x ¼ 0. The
concavity of the profits function and Eq. (6) implies that it is optimal to set x [ 0.
The firm can pick x0 2 ð0; cs Þ such that pðx0 Þ ¼ p0 and pðx0 Þ ¼ p0 as long as
p1  p0 ¼ x0 \cs . Note that p01 ¼ 0 at x0 . Equation (6) implies then that x0 2 ð0; cs Þ
maximizes profits. This proves (ii). However, the firm cannot pick x0 2 ð0; cs Þ such
that pðx0 Þ ¼ p0 and pðx0 Þ ¼ p0 if p1  p0 ¼ x0  cs . Hence, p01 [ 0 for any
x 2 ð0; cs Þ. This proves (iii). h
It is important to note that third-degree price discrimination can explain free
parking. Hasker and Inci (2014) claim that no paper in the price discrimination
literature explains free parking. Furthermore, they believe this is not possible. In
their model, the natural way to implement price discrimination would be a two-part
tariff because all customers are drivers and identical. Thus the firm cannot
distinguish among them. However, in the model that we propose, the firm can
distinguish ex-post between drivers and pedestrians. Therefore, it can implement
third-degree price discrimination that favors drivers through a reduced parking fee.
In an extreme case, the parking fee can be zero.

6 Production

We already know that free parking distorts the allocation of goods between drivers
and pedestrians. In principle, this argument suggests that parking charges would
correct this distortion and increase welfare. However, several articles in the
literature on third-degree price discrimination show that this is not necessarily the
case. In particular, under certain circumstances price discrimination generates a
trade-off between allocation efficiency and total production. Therefore, it is
important to evaluate the effect of parking charges on total production.
Define total production of the good as Q = q0 ? q1. That is, total production is
the sum of goods that are allocated to drivers and pedestrians. In order to evaluate
the effect of parking charges, consider the derivative of total production with respect
to x. That is,
 
oQ 0 dp 0 dp q0  q0
¼ q0  þ q1  þ 1 ¼ 00 0 001 fðp  c þ x  cs Þ  r1  ðp  cÞ  r0 g:
ox dx dx p0 þ p1
ð7Þ

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Parking Discounts: Price Discrimination with Different… 99

This expression says that the relative concavity (or convexity) of the demand
functions as well as the mark-ups in the two markets are crucial to determine the
effect of a small increase in parking charges on total production. More precisely, we
can write the following.
Proposition 3 For a given x 2 ½0; cs , a small increase in parking charges has the
following possible effects: (i) it increases production (i.e., oQ ox [ 0) if
 
cs x oQ
r0 \r1 1  pc ; (ii) it keeps production unchanged (i.e., ox ¼ 0) if
   
s x cs x
r0 ¼ r1 1  cpc ; or (iii) it reduces production (i.e., oQ
ox \0) if r 0 [ r 1 1  pc .

Proof It follows straightforward from (7).

Although a small increase in the parking fee has an ambiguous effect on total
production, under certain conditions we can establish that it increases or decreases
production for all potential parking fees. If the demand of drivers is sufficiently
more concave than the demand of pedestrians, then a small increase in the parking
fee will always increase total production. On the other hand, if the demand of
pedestrians is sufficiently more concave than the demand of drivers, then a small
increase in the parking fee will always reduce total production.

7 Welfare

In this section, we study the effects of parking charges on welfare. It turns out that
either free parking, partial parking charges, or full parking charges can be socially
optimal depending on the relative curvature of demand functions and the marginal
cost of parking.
R pm
Define consumer surplus of drivers and pedestrians as CS0 ¼ p 0 q0 ðzÞdz and
R pm
CS1 ¼ pþx 1
q1 ðzÞdz, respectively. Consider the traditional definition of welfare as
the sum of consumers’ surplus and profits.
W ð xÞ ¼ CS0 ðpð xÞÞ þ CS1 ðpð xÞ þ xÞ þ pðpð xÞ þ xÞ: ð8Þ
Differentiate (8) implicitly with respect to x and use (6) as well as the fact that
¼ q0 and oCS
dCS0
dp op ¼ ox ¼ q1 in order to obtain
1 oCS1

oW dp
¼  ðq1 þ q0 Þ þ ðp  c þ x  cs Þq01 : ð9Þ
ox dx
It follows from proposition 1 and Eq. (2) that we can rewrite (9) as
oW q00  q01
¼ 00 f2ðcs  xÞ þ ðp  cÞðp  c þ x  cs Þðr1  r0 Þg: ð10Þ
ox p0 þ p001

Define x 2 ½0; cs  as the optimal parking charge for drivers from the welfare
point of view. Note that x ¼ 0 and x ¼ cs are possible corner solutions. That is,
the welfare function may be decreasing at x ¼ 0 or increasing at x ¼ cs . Note also

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100 D. Flores, V. Kalashnikov

that if the demand of drivers is at least as concave as the demand of pedestrians (i.e.,
r1  r0 ), then the welfare function is increasing for any x 2 ½0; cs Þ. In this case,
welfare is clearly maximized by charging drivers the full cost of parking. Formally,
we have the following.
Proposition 4 It is socially optimal to charge drivers the full cost of parking (i.e.,
x ¼ cs ) if and only if r1  r0 .
Proof See ‘‘Appendix’’.
It is important to state that the result does not depend on whether drivers are the
strong or the weak market. Therefore, the firm may find it profitable to provide free
or reduced price parking when it is socially desirable to charge drivers the full cost
of parking.
The shape of the welfare function is not straightforward if the demand of
pedestrians is more concave than the demand of drivers (i.e., r1 \r0 ). Therefore, we
have to make some additional assumptions in order to establish conditions under
which either free or reduced price parking is optimal from the welfare point of view.
First, assume [as do Aguirre et al. (2010)] that the increasing ratio condition
(IRC) holds in both markets.13 This condition guarantees the concavity of the
welfare function at the critical point. Second, assume that drivers’ demand function
at x ¼ 0 is sufficiently concave (i.e., r1  pcc 1
s
) to guarantee that the pass-through
rate of marginal cost to price is less than or equal to one. This condition is met by
two of the three classes of demand functions in Bulow and Pfleiderer (1983). Third,
assume that the curvature of drivers’ demand grows as fast as the curvature of
pedestrians’ demand (i.e., drdp1  drdp0 ) at x ¼ 0. This condition is clearly satisfied by
functions of the form qi ¼ ai  bi  pci that we used as an example in a previous
section.14
Proposition 5 Suppose that the IRC holds and that r0 [ r1  pcc 1
and drdp1  drdp0 are
s
 
satisfied at x ¼ 0. There exists a critical marginal cost of parking cs 2 0; cm
o
s such
that it is optimal from the welfare point of view to offer drivers (a) free parking (i.e.,
x ¼ 0) if cs  cos and (b) reduced price parking (i.e., 0\x \cs ) if cs [ cos .
Proof See ‘‘Appendix’’.
This proposition states that free parking can be efficient if two conditions are met.
First, the marginal cost of parking should be relatively low. Second, the demand of
pedestrians should be more concave that the demand of drivers. The intuition of this
result is straightforward: Suppose that the parking fee is zero. Given that the
demand of pedestrians is more concave than the demand of drivers, increasing the
parking fee will reduce total output. This is not socially desirable. On the other
hand, increasing the parking fee will help to eliminate the misallocation of output

13 0 ðpcÞq00
The IRC requires that ðpcþxc
p
Þq
and
00
1
s 1
p000 are increasing in p. This condition is met by many demand
functions that are used in economics.
14
Note that r0 ¼ c p1 [ c p1 ¼ r1 at x ¼ 0 as long as c0 [ c1 . It is easy then to see that this condition
0 1

implies that drdp ¼ ðcp 1Þ  ðcp 1Þ ¼ drdp .

1 1
2
0
2
0

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Parking Discounts: Price Discrimination with Different… 101

between drivers and pedestrians that is based on the difference in marginal costs.
However, allocation efficiency gains can become arbitrarily small if we assume that
the marginal cost of parking is sufficiently low.
It is important to distinguish our welfare results from those in Chen and Schwartz
(2015). We try to determine whether free parking (i.e., x ¼ 0), reduced-price
parking (i.e., 0\x\cs ), or full-price parking (i.e., x ¼ cs ) is socially optimal. On
the other hand, Chen and Schwartz (2015) compare uniform pricing (i.e., x ¼ 0)
with cost-based differential pricing (i.e., x ¼ p1  p0 ). Although the essence of the
problems is the same (except for the constraint), they focus on two points of the
welfare function while we look at the shape of the function within the bounds of the
constraint.
Assuming linear demands (i.e., r1 ¼ r0 ¼ 0), Chen and Schwartz (2015) find that
differential pricing has an ambiguous effect on welfare: Welfare is higher (or lower)
under differential pricing (i.e., x ¼ p1  p0 ) than under uniform pricing (i.e., x ¼ 0)
if the difference in marginal costs (i.e., cs ) is relatively large (or small).15 On the
other hand, we show that full-price parking (i.e., x ¼ cs ) is socially optimal for a
large set of demand functions that includes linear demands (i.e., r1  r0 ). This result
holds regardless of whether differential pricing increases or decreases welfare.

8 Conclusions

Reduced-price parking, as any other courtesy, can be considered to be a form of

price discrimination. This practice may be profitable for firms under certain
circumstances. If the optimal price under third-degree price discrimination
prescribes offering drivers a lower price than is offered to pedestrians, then the
firm can increase profits by giving drivers a price discount in the form of
complimentary parking. However, if the optimal price under price discrimination
prescribes offering pedestrians a lower price than is offered to drivers, then the firm
prefers to charge for parking. Therefore, it is reasonable to find in shopping centers
that some shops or restaurants provide complimentary or reduced price parking
while others do not.
Regardless of whether firms have incentives to provide it or not, free parking can
be socially optimal if two conditions are satisfied: The demand by pedestrians for
the good is more concave than is the demand by drivers; and the market price of
parking is relatively low. However, these conditions are not satisfied in many
circumstances. For instance, if the demands of drivers and pedestrians are linear,
then it is socially optimal to charge drivers the full cost of parking. Hence,
regulation that prohibits parking charges has an ambiguous effect on welfare. As a
result of this theoretical exercise, we conclude that a general prohibition on parking
charges in urban areas is difficult to justify on the grounds of economic efficiency.

15
Chen and Schwartz (2015) also find conditions under which differential pricing increases welfare with
respect to uniform pricing for a large set of demand functions. One of the conditions that is crucial for this
result to hold is that the difference in marginal costs between the two groups (i.e., cs ) is sufficiently large.

123
102 D. Flores, V. Kalashnikov

Acknowledgments The authors acknowledge helpful suggestions of two anonymous referees and the
editor.

Funding The authors declare that they received no research funding to elaborate this article.

Compliance with Ethical Standards

Conflict of interest The authors declare that they have no conflict of interest.

Appendix

Proof of Proposition 4 Profitable markets and r1  r0  0 imply that

f2ðcs  xÞ þ ðp  cÞðp  c þ x  cs Þðr1  r0 Þg [ 0 for all x 2 ½0; cs Þ and
f2ðcs  xÞ þ ðp  cÞðp  c þ x  cs Þðr1  r0 Þg  0 at x ¼ cs . Therefore, r1 
r0  0 implies x ¼ cs . On the other hand, profitable markets and r1  r0 \0 imply
that f2ðcs  xÞ þ ðp  cÞðp  c þ x  cs Þðr1  r0 Þg\0 at x ¼ cs . Therefore, x ¼
cs only if r1  r0  0. h
Proof of Proposition 5 Given that the IRC holds, it suffices to check derivatives at
x ¼ 0 and x ¼ cs to know whether the maximum is achieved at an extreme or an
interior point. Proposition 4 implies 0  x \cs . Therefore, suppose that x ¼ 0 and
define f ðcs Þ  2cs þ ðp  cÞðp  c  cs Þðr1  r0 Þ. The sign of this function deter-
mines whether the slope of the welfare function is positive, zero, or negative at
x ¼ 0. Note that f ðcs Þ ! ðp  cÞ2 ðr1  r0 Þ\0 as cs ! 0 and f ðcs Þ ! 2cm s [ 0 as
 m  o
cs ! cm s . Hence, there exists c o
s 2 0; c s such that f c s ¼ 0. It remains to show
that cos is unique. Differentiate (2) implicitly with respect to cs in order to find
q01
dcs ¼ p000 þp001 . r1  ðpcc
dp 1
It follows from sÞ
, (3) and (4) that
q0
q 0  
0 o
0\dcs ¼ p000 þp001 \p001 ¼ ðpccs Þr1 þ2  1. Note that 0\dcs \1 and dp  dp imply that f cs ¼
dp 1 1 1 dp dr1 dr0

ðp  cÞðp  c  cos Þdcdps

 
ðdrdp1  drdp0 Þ þ ðr0  r1 Þ ðp  c  cos Þðpc cos  dcs Þ þ ðp  cÞð1  dcs Þ [ 0. Therefore, cs
dp dp o

is unique. h

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