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Price Discrimination in Input Markets and Quality Differentiation

Price Discrimination in Input Markets and Quality Differentiation This paper examines the welfare implications of input price discrimination in a vertically-related market, which is composed of a monopolistic upstream market and a duopolistic downstream market. The downstream duopolists produce quality-differentiated products at different marginal costs. We show that the equilibrium input prices are closely related to the downstream quality gap and cost difference. When the monopolist simply charges a unit wholesale price for its input product, discriminatory pricing could be socially desirable even though the aggregate output remains unchanged. Nevertheless, if a two-part tariff is feasible, then banning price discrimination could increase the aggregate output and social welfare. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Industrial Organization Springer Journals

Price Discrimination in Input Markets and Quality Differentiation

Chen, Chin-Sheng
Review of Industrial Organization , Volume 50 (3) – Jul 18, 2016
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References (29)

Publisher
Springer Journals
Copyright
Copyright © 2016 by Springer Science+Business Media New York
Subject
Economics; Industrial Organization; Microeconomics
ISSN
0889-938X
eISSN
1573-7160
DOI
10.1007/s11151-016-9537-9
Publisher site
See Article on Publisher Site

Abstract

This paper examines the welfare implications of input price discrimination in a vertically-related market, which is composed of a monopolistic upstream market and a duopolistic downstream market. The downstream duopolists produce quality-differentiated products at different marginal costs. We show that the equilibrium input prices are closely related to the downstream quality gap and cost difference. When the monopolist simply charges a unit wholesale price for its input product, discriminatory pricing could be socially desirable even though the aggregate output remains unchanged. Nevertheless, if a two-part tariff is feasible, then banning price discrimination could increase the aggregate output and social welfare.

Journal

Review of Industrial Organization – Springer Journals

Published: Jul 18, 2016

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