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Wholesale price discrimination: Innovation incentives and upstream competition

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  • Uğur Akgün
  • Ioana Chioveanu

Abstract

In intermediate good markets where there are alternative supply sources, wholesale price discrimination may enhance innovation incentives downstream. We consider a vertical chain where a dominant firm and a competitive fringe supply imperfect substitutes to duopoly retailers which carry both varieties. We show that a ban on price discrimination by the dominant supplier makes uniform pricing credible and reduces retailers’ incentives to decrease the cost of acquiring the competitively supplied variety, leading to higher upstream profits and lower downstream welfare. Our analysis complements existing results by identifying a novel channel through which wholesale price discrimination can improve dynamic market efficiency.

Suggested Citation

  • Uğur Akgün & Ioana Chioveanu, 2019. "Wholesale price discrimination: Innovation incentives and upstream competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 28(3), pages 510-519, June.
  • Handle: RePEc:bla:jemstr:v:28:y:2019:i:3:p:510-519
    DOI: 10.1111/jems.12284
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    References listed on IDEAS

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