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Price Discrimination in Input Markets and Quality Differentiation

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  • Chin-Sheng Chen

    (Soochow University)

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.

Suggested Citation

  • Chin-Sheng Chen, 2017. "Price Discrimination in Input Markets and Quality Differentiation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 50(3), pages 367-388, May.
    • Handle: RePEc:kap:revind:v:50:y:2017:i:3:d:10.1007_s11151-016-9537-9
    DOI: 10.1007/s11151-016-9537-9
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jiaxin Han & Chenhang Zeng, 2023. "The effects of downstream entry in a vertical mixed oligopoly: the role of input pricing," Journal of Economics, Springer, vol. 140(1), pages 37-61, September.
    2. Wang, Xingtang, 2022. "Input price discrimination, pricing contract and social welfare," Mathematical Social Sciences, Elsevier, vol. 119(C), pages 91-96.
    3. Ioannis N. Pinopoulos, 2020. "Input Price Discrimination and Upstream R&D Investments," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 57(1), pages 85-106, August.
    4. Brito, Duarte & Tselekounis, Markos & Vasconcelos, Helder, 2019. "Input price discrimination in the presence of downstream vertical differentiation," Economics Letters, Elsevier, vol. 184(C).
    5. Chin-Sheng Chen, 2022. "Input Price Discrimination and Allocation Efficiency," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 60(1), pages 93-107, February.
    6. Toshiki Matsuoka, 2023. "Input price discrimination and strategic inventory," Manchester School, University of Manchester, vol. 91(2), pages 118-138, March.
    7. Xingtang Wang & Jie Li, 2020. "Downstream rivals’ competition, bargaining, and welfare," Journal of Economics, Springer, vol. 131(1), pages 61-75, September.
    8. Xingtang Wang & Lin Zhang, 2022. "Monopolistic third-degree price discrimination, welfare, and vertical market structure," Review of Economic Design, Springer;Society for Economic Design, vol. 26(1), pages 75-86, March.
    9. Kangsik Choi & Seonyoung Lim, 2023. "Input Price Discrimination in Endogenous Competition Mode," The Japanese Economic Review, Springer, vol. 74(2), pages 301-330, April.
    10. Marc Escrihuela‐Villar & Walter Ferrarese, 2022. "Asymmetric input contracts under price leadership," Manchester School, University of Manchester, vol. 90(1), pages 77-91, January.

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    More about this item

    Keywords

    Input price discrimination; Wholesale price discrimination; Quality differentiation; Two-part tariffs; Social welfare;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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