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Price Discrimination in Input Markets

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Author Info

  • 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
Phone: +390672595601
Fax: +39062020687
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Web page: http://www.ceistorvergata.it
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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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Web: http://www.ceistorvergata.it

Related research

Keywords: Price Discrimination; Uniform Pricing; Input Market;

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References

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  1. AMIR, Rabah & EVSTIGNEEV, Igor & WOODERS, John, . "Noncooperative versus cooperative R&D with endogenous spillover rates," CORE Discussion Papers RP -1650, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  3. Yoshihiro Yoshida, 2000. "Third-Degree Price Discrimination in Input Markets: Output and Welfare," American Economic Review, American Economic Association, vol. 90(1), pages 240-246, March.
  4. Patrick de Graba, 1996. "Most-Favored-Customer Clauses and Multilateral Contracting: When Nondiscrimination Implies Uniformity," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(4), pages 565-579, December.
  5. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, January.
  6. 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.
  7. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-30, March.
  8. 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, vol. 10(2), pages 296-318, October.
  9. DeGraba, Patrick, 1990. "Input Market Price Discrimination and the Choice of Technology," American Economic Review, American Economic Association, vol. 80(5), pages 1246-53, December.
  10. 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.
  11. Emmanuel Petrakis & Chrysovalantou Miliou & Nikos Vettas, 2009. "(In)efficient trading forms in competing vertical chains," Working Papers 0916, University of Crete, Department of Economics.
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Citations

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Cited by:
  1. Valletti, T & Iozzi, A, . "Vertical bargaining and countervailing power," Working Papers 5958, Imperial College, London, Imperial College Business School.
  2. Noriaki Matsushima & Tomomichi Mizuno, 2010. "How do market structures affect decisions on vertical integration/separation?," ISER Discussion Paper 0770, Institute of Social and Economic Research, Osaka University.
  3. Reisinger, Markus & Schnitzer, Monika E, 2008. "A Model of Vertical Oligopolistic Competition," Department of Economics, Working Paper Series qt3n9000fg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Li, Youping, 2013. "Timing of investments and third degree price discrimination in intermediate good markets," Economics Letters, Elsevier, vol. 121(2), pages 316-320.
  5. Chrysovalantou Milliou, 2013. "Location of Foreign Direct Investment in Vertically Related Markets," CESifo Working Paper Series 4117, CESifo Group Munich.
  6. Daniel Müller & Fabian Herweg, 2009. "Price Discrimination in Input Markets: Downstream Entry and Welfare," Bonn Econ Discussion Papers bgse06_2010, University of Bonn, Germany.
  7. Li, Youping, 2011. "Timing of investments and third degree price discrimination in intermediate good markets," MPRA Paper 36746, University Library of Munich, Germany.
  8. Alexandrov, Alexei & Deb, Joyee, 2012. "Price discrimination and investment incentives," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 615-623.
  9. Herweg, Fabian & Müller, Daniel, 2011. "Price Discrimination in Input Markets: Quantity Discounts and Private Information," Discussion Papers in Economics 12414, University of Munich, Department of Economics.
  10. Roman Inderst & Christian Wey, 2008. "Die Wettbewerbsanalyse von Nachfragemacht aus verhandlungstheoretischer Sicht," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 9(4), pages 465-485, November.
  11. David Mills, 2010. "Buyer Power and Industry Structure," Review of Industrial Organization, Springer, vol. 36(3), pages 213-225, May.
  12. Dertwinkel-Kalt, Markus & Haucap, Justus & Wey, Christian, 2013. "Input price discrimination (bans), entry and welfare," DICE Discussion Papers 99, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  13. Fabian Herweg & Daniel Müller, 2012. "Price Discrimination in Input Markets: Downstream Entry and Efficiency," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(3), pages 773-799, 09.
  14. Inderst, Roman & Shaffer, Greg, 2011. "Wholesale Price Determination Under the Threat of Demand-Side Substitution," MPRA Paper 53843, University Library of Munich, Germany.
  15. Reisinger, Markus, 2010. "Unique Equilibrium in Two-Part Tariff Competition between Two-Sided Platforms," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 308, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  16. Hiroshi Kitamura & Noriaki Matsushima & Misato Sato, 2013. "How Does Downstream Firms' Efficiency Affect Exclusive Supply Agreements?," ISER Discussion Paper 0878, Institute of Social and Economic Research, Osaka University.

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