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Market power, price discrimination, and allocative efficiency in intermediate‐goods markets

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  • Roman Inderst
  • Greg Shaffer

Abstract

We consider a monopolistic supplier's optimal choice of two‐part tariff contracts when downstream firms are asymmetric. We find that the optimal discriminatory contracts amplify differences in downstream firms' competitiveness. Firms that are larger—either because they are more efficient or because they sell a superior product—obtain a lower wholesale price than their rivals. This increases allocative efficiency by favoring the more productive firms. In contrast, we show that a ban on price discrimination reduces allocative efficiency and can lead to higher wholesale prices for all firms. As a result, consumer surplus, industry profits, and welfare are lower.

Suggested Citation

  • Roman Inderst & Greg Shaffer, 2009. "Market power, price discrimination, and allocative efficiency in intermediate‐goods markets," RAND Journal of Economics, RAND Corporation, vol. 40(4), pages 658-672, December.
    • Handle: RePEc:bla:randje:v:40:y:2009:i:4:p:658-672
    DOI: 10.1111/j.1756-2171.2009.00083.x
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    References listed on IDEAS

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