Roman Inderst () (London School of Economics & Political Science) Tommaso Valletti () (Imperial College London, University of Rome "Tor Vergata" and CEPR)
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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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Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number
73.
Length: 28 Date of creation: 01 Jul 2006 Date of revision: Handle: RePEc:rtv:ceisrp:73
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