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Price Discrimination in Input Markets: Downstream Entry and Efficiency

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  • Fabian Herweg
  • Daniel Müller

Abstract

The extant theory on price discrimination in input markets takes the structure of the downstream industry as exogenously given. This paper endogenizes the structure of the downstream industry and examines the effects of permitting third‐degree price discrimination on market structure and welfare. We identify situations where permitting price discrimination leads to either higher or lower wholesale prices for all downstream firms. These findings are driven by upstream profits being discontinuous due to costly entry. Moreover, permitting price discrimination fosters entry which often improves welfare. Nevertheless, entry can also reduce welfare because it may lead to a severe inefficiency in production.

Suggested Citation

  • 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, September.
  • Handle: RePEc:bla:jemstr:v:21:y:2012:i:3:p:773-799
    DOI: j.1530-9134.2012.00344.x
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    File URL: https://doi.org/10.1111/j.1530-9134.2012.00344.x
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    References listed on IDEAS

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    7. Dertwinkel-Kalt, Markus & Haucap, Justus & Wey, Christian, 2013. "Input price discrimination (bans), entry and welfare," DICE Discussion Papers 99, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
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    11. Layson, Stephen K, 1994. "Market Opening under Third-Degree Price Discrimination," Journal of Industrial Economics, Wiley Blackwell, vol. 42(3), pages 335-340, September.
    12. Anil Arya & Brian Mittendorf, 2010. "Input Price Discrimination When Buyers Operate In Multiple Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 58(4), pages 846-867, December.
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    Cited by:

    1. 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.
    2. Jeongmeen Suh & Sihoon Nahm & Seung-Gyu Sim, 2016. "The Most Favored Nation Principle: Passive Constraint or Active Commitment?," Korean Economic Review, Korean Economic Association, vol. 32, pages 77-99.
    3. Jong-Hee Hahn & Chan KIm, 2018. "Input price discrimination with differentiated final products," Working papers 2018rwp-118, Yonsei University, Yonsei Economics Research Institute.
    4. 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.
    5. Herweg, Fabian & Müller, Daniel, 2016. "Discriminatory nonlinear pricing, fixed costs, and welfare in intermediate-goods markets," International Journal of Industrial Organization, Elsevier, vol. 46(C), pages 107-136.
    6. Fabian Herweg & Daniel Müller, 2014. "Price Discrimination in Input Markets: Quantity Discounts and Private Information," Economic Journal, Royal Economic Society, vol. 124(577), pages 776-804, June.
    7. Timothy Brennan, 2013. "Mitigating Monopoly or Preventing Discrimination: Comparing Antitrust to Regulatory Goals in the Interstate Commerce Act," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 43(1), pages 103-119, August.
    8. Brito, Duarte & Tselekounis, Markos & Vasconcelos, Helder, 2019. "Input price discrimination in the presence of downstream vertical differentiation," Economics Letters, Elsevier, vol. 184(C).
    9. Kim, Hyunchul & Sim, Seung-Gyu, 2015. "Price discrimination and sequential contracting in monopolistic input markets," Economics Letters, Elsevier, vol. 128(C), pages 39-42.
    10. Chin-Sheng Chen & Hong Hwang, 2014. "Spatial Price Discrimination in Input Markets with an Endogenous Market Boundary," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 45(2), pages 139-152, September.
    11. Chin-Sheng Chen, 2016. "Endogenous market boundary and spatial price discrimination with a quadratic production cost function," Letters in Spatial and Resource Sciences, Springer, vol. 9(2), pages 157-168, July.
    12. Markus Dertwinkel-Kalt & Justus Haucap & Christian Wey, 2016. "Procompetitive dual pricing," European Journal of Law and Economics, Springer, vol. 41(3), pages 537-557, June.
    13. Youping Li, 2017. "Differential Pricing in Intermediate Good Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 65(3), pages 585-596, September.

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