Review of Industrial Organization (2006) 28:63–80 © Springer 2006
Multilateral Vertical Contracting with an
Alternative Supply: The Welfare Effects
of a Ban on Price Discrimination
University of Toulouse (INRA), B
at.F, 21 All
ee de Brienne, F-31000 Toulouse, France
Abstract. Rey and Tirole [Handbook of Industrial Organization. Amsterdam: Elsevier (2005)]
considered a model in which a monopolist sells to downstream ﬁrms using nonlinear
contracts. They showed that banning price discrimination fully restores the supplier’s abil-
ity to leverage its monopoly power by enabling it to commit not to offer side discounts.
I show that the situation changes when the supplier competes against a fringe of less efﬁ-
cient rivals rather than being a monopolist. Then banning price discrimination may cause
per-unit prices to fall and welfare to increase. The dominant supplier can take advantage
of a strategic bargaining effect: reducing the per-unit price makes the outside option of
buying from the fringe less proﬁtable, allowing the dominant supplier to extract more bar-
gaining surplus through the ﬁxed fee.
Key words: bargaining effect, bilateral oligopoly, price discrimination, vertical contracting.
JEL Classiﬁcations: K21, L13, L42.
Antitrust authorities have been signiﬁcantly concerned with price dis-
crimination in intermediate-good markets. For example, the principal act
covering price discrimination in the United States, the Robinson–Patman
Act, was introduced with the explicit intention of protecting small busi-
ness from unfair advantages possessed by large buyers in intermediate-good
markets. There has been considerable back and forth in the academic lit-
erature about whether banning price discrimination on intermediate-good
markets is good policy.
Bork’s (1978) view was that price discrimination in intermediate-good
markets is likely to be socially efﬁcient and thus should not be pro-
scribed. He suggested that price discrimination enables an upstream sup-
plier to make selective price cuts to those customers over whom it has
the least market power, price cuts that would not be proﬁtable if price