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Price Discrimination in Input Markets

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  • Roman Inderst

    ()
    (London School of Economics & Political Science)

  • Tommaso Valletti

    ()
    (Imperial College London, University of Rome "Tor Vergata" and CEPR)

Abstract

We analyze the short- and long-run implications of third-degree price discrimination in input markets where downstream firms differ in their efficiency. In contrast to the extant literature, where the supplier is typically an unconstrained monopolist, in our model input prices are constrained by the potential for demand-side substitution. This modification has far-reaching consequences. We show that more efficient firms receive lower input prices under price discrimination, and that the imposition of uniform pricing could stifle incentives to reduce own marginal costs. If downstream firms compete in the same market, we also find a waterbed effect, in that a reduction in a firm's own marginal costs not only reduces its own input price, but increases the input price of its competitors.

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Bibliographic Info

Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 73.

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Length: 28
Date of creation: 01 Jul 2006
Date of revision:
Handle: RePEc:rtv:ceisrp:73

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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Keywords: Price Discrimination; Uniform Pricing; Input Market;

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  1. Yoshihiro Yoshida, 2000. "Third-Degree Price Discrimination in Input Markets: Output and Welfare," American Economic Review, American Economic Association, American Economic Association, vol. 90(1), pages 240-246, March.
  2. AMIR, Rabah & EVSTIGNEEV, Igor & WOODERS, John, . "Noncooperative versus cooperative R&D with endogenous spillover rates," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -1650, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. O'Brien, Daniel P & Shaffer, Greg, 1994. "The Welfare Effects of Forbidding Discriminatory Discounts: A Secondary Line Analysis of Robinson-Patman," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 10(2), pages 296-318, October.
  4. Emmanuel Petrakis & Chrysovalantou Miliou & Nikos Vettas, 2009. "(In)efficient trading forms in competing vertical chains," Working Papers, University of Crete, Department of Economics 0916, University of Crete, Department of Economics.
  5. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 026272040x, December.
  6. Katz, Michael L, 1987. "The Welfare Effects of Third-Degree Price Discrimination in," American Economic Review, American Economic Association, American Economic Association, vol. 77(1), pages 154-67, March.
  7. Patrick J. DeGraba, 1987. "The Effects of Price Restrictions on Competition Between National and Local Firms," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 333-347, Autumn.
  8. Patrick de Graba, 1996. "Most-Favored-Customer Clauses and Multilateral Contracting: When Nondiscrimination Implies Uniformity," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 5(4), pages 565-579, December.
  9. DeGraba, Patrick, 1990. "Input Market Price Discrimination and the Choice of Technology," American Economic Review, American Economic Association, American Economic Association, vol. 80(5), pages 1246-53, December.
  10. Thomas E. Cooper, 1986. "Most-Favored-Customer Pricing and Tacit Collusion," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 377-388, Autumn.
  11. Michael L. Katz, 1986. "An Analysis of Cooperative Research and Development," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 527-543, Winter.
  12. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, American Economic Association, vol. 84(1), pages 210-30, March.
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