Timing of investments and third degree price discrimination in intermediate good markets
AbstractWe study third degree price discrimination in intermediate good markets, in which costs of production for the downstream firms are determined by their investment choices. We focus on the effect of the sequence of firm actions and analyze two models with different timing of investments, before or after the upstream monopolist sets the input prices. When investments are determined after the prices are set, an indirect effect of input prices on the derived demand from downstream firms must be taken into account, due to the change of investment incentives. This causes the upstream firm to possibly charge the more efficient downstream firm a lower price, a result contrasting previous findings. Using linear demand and quadratic investment costs, we show that not only the downstream firms but also the upstream monopolist prefers the sequence of play in the latter model, i.e., it benefits from committing to prices before investments are undertaken. A change of timing from the first model to the second constitutes a strict Pareto improvement.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 36746.
Date of creation: Sep 2011
Date of revision:
price discrimination; intermediate good; investments; timing;
Find related papers by JEL classification:
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
- D40 - Microeconomics - - Market Structure and Pricing - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-21 (All new papers)
- NEP-BEC-2012-03-21 (Business Economics)
- NEP-COM-2012-03-21 (Industrial Competition)
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