IDEAS home Printed from https://ideas.repec.org/a/bla/randje/v40y2009i4p658-672.html
   My bibliography  Save this article

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

Author

Listed:
  • 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. Copyright (c) 2009, RAND.

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.
  • Handle: RePEc:bla:randje:v:40:y:2009:i:4:p:658-672
    as

    Download full text from publisher

    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1756-2171.2009.00083.x
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. James Bessen & Robert M. Hunt, 2007. "An Empirical Look at Software Patents," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(1), pages 157-189, March.
    2. Silverberg, Gerald & Verspagen, Bart, 2004. "The size distribution of innovations revisited: an application of extreme value statistics to citation and value measures of patent significance," Research Memorandum 021, Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT).
    3. Mansfield, Edwin & Schwartz, Mark & Wagner, Samuel, 1981. "Imitation Costs and Patents: An Empirical Study," Economic Journal, Royal Economic Society, vol. 91(364), pages 907-918, December.
    4. Wiggins, Steven N & Libecap, Gary D, 1985. "Oil Field Unitization: Contractual Failure in the Presence of Imperfect Information," American Economic Review, American Economic Association, pages 368-385.
    5. Grossman, Sanford J., 1977. "A characterization of the optimality of equilibrium in incomplete markets," Journal of Economic Theory, Elsevier, vol. 15(1), pages 1-15, June.
    6. Nancy Gallini & Suzanne Scotchmer, 2002. "Intellectual Property: When Is It the Best Incentive System?," NBER Chapters,in: Innovation Policy and the Economy, Volume 2, pages 51-78 National Bureau of Economic Research, Inc.
    7. Michael L. Katz & Carl Shapiro, 1986. "How to License Intangible Property," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 567-589.
    8. Bessen, James, 2005. "Patents and the diffusion of technical information," Economics Letters, Elsevier, vol. 86(1), pages 121-128, January.
    9. Dasgupta, Partha & Maskin, Eric, 1987. "The Simple Economics of Research Portfolios," Economic Journal, Royal Economic Society, vol. 97(387), pages 581-595, September.
    10. Silverberg, Gerald & Verspagen, Bart, 2007. "The size distribution of innovations revisited: An application of extreme value statistics to citation and value measures of patent significance," Journal of Econometrics, Elsevier, pages 318-339.
    11. Suzanne Scotchmer & Jerry Green, 1990. "Novelty and Disclosure in Patent Law," RAND Journal of Economics, The RAND Corporation, pages 131-146.
    12. Robert M. Hunt, 2004. "Patentability, Industry Structure, and Innovation," Journal of Industrial Economics, Wiley Blackwell, vol. 52(3), pages 401-425, September.
    13. Shavell, Steven & van Ypersele, Tanguy, 2001. "Rewards versus Intellectual Property Rights," Journal of Law and Economics, University of Chicago Press, vol. 44(2), pages 525-547, October.
    14. Tom Lee & Louis L. Wilde, 1980. "Market Structure and Innovation: A Reformulation," The Quarterly Journal of Economics, Oxford University Press, vol. 94(2), pages 429-436.
    15. Pakes, Ariel & Schankerman, Mark A., 1978. "The Rate of Obsolescence of Knowledge, Research Gestation Labs, and the Private Rate of Return to Research Resources," Working Papers 78-13, C.V. Starr Center for Applied Economics, New York University.
    16. Fershtman, Chaim & Kamien, Morton I., 1992. "Cross licensing of complementary technologies," International Journal of Industrial Organization, Elsevier, pages 329-348.
    17. Scherer, F. M. & Harhoff, Dietmar, 2000. "Technology policy for a world of skew-distributed outcomes," Research Policy, Elsevier, pages 559-566.
    18. Pakes, Ariel & Schankerman, Mark A., 1978. "The Rate of Obsolescence of Knowledge, Research Gestation Labs, and the Private Rate of Return to Research Resources," Working Papers 78-13, C.V. Starr Center for Applied Economics, New York University.
    19. Fershtman, Chaim & Safra, Zvi & Vincent, Daniel, 1991. "Delayed agreements and nonexpected utility," Games and Economic Behavior, Elsevier, pages 423-437.
    20. Ted O'Donoghue & Suzanne Scotchmer & Jacques-François Thisse, 1998. "Patent Breadth, Patent Life, and the Pace of Technological Progress," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 1-32, March.
    21. Spence, Michael, 1984. "Cost Reduction, Competition, and Industry Performance," Econometrica, Econometric Society, vol. 52(1), pages 101-121, January.
    22. Bessen, James, 2004. "Holdup and licensing of cumulative innovations with private information," Economics Letters, Elsevier, vol. 82(3), pages 321-326, March.
    23. Gallini, Nancy T, 1984. "Deterrence by Market Sharing: A Strategic Incentive for Licensing," American Economic Review, American Economic Association, pages 931-941.
    24. Richard C. Levin & Alvin K. Klevorick & Richard R. Nelson & Sidney G. Winter, 1987. "Appropriating the Returns from Industrial Research and Development," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, pages 783-832.
    25. Glenn C. Loury, 1979. "Market Structure and Innovation," The Quarterly Journal of Economics, Oxford University Press, vol. 93(3), pages 395-410.
    26. Machlup, Fritz & Penrose, Edith, 1950. "The Patent Controversy in the Nineteenth Century," The Journal of Economic History, Cambridge University Press, vol. 10(01), pages 1-29, May.
    27. Richard C. Levin & Alvin K. Klevorick & Richard R. Nelson & Sidney G. Winter, 1988. "Appropriating the Returns from Industrial R&D," Cowles Foundation Discussion Papers 862, Cowles Foundation for Research in Economics, Yale University.
    28. Ariel Pakes & Mark Schankerman, 1984. "The Rate of Obsolescence of Patents, Research Gestation Lags, and the Private Rate of Return to Research Resources," NBER Chapters,in: R&D, Patents, and Productivity, pages 73-88 National Bureau of Economic Research, Inc.
    29. Pankaj Tandon, 1983. "Rivalry and the Excessive Allocation of Resources to Research," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 152-165, Spring.
    30. Fershtman, Chaim & Kamien, Morton I., 1992. "Cross licensing of complementary technologies," International Journal of Industrial Organization, Elsevier, pages 329-348.
    31. Suzanne Scotchmer, 1991. "Standing on the Shoulders of Giants: Cumulative Research and the Patent Law," Journal of Economic Perspectives, American Economic Association, pages 29-41.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chrysovalantou Milliou, 2014. "Location for Foreign Direct Investment in Vertically Related Markets," Review of International Economics, Wiley Blackwell, pages 326-341.
    2. Daniel Müller & Fabian Herweg, 2009. "Price Discrimination in Input Markets: Downstream Entry and Welfare," Bonn Econ Discussion Papers bgse06_2010, University of Bonn, Germany.
    3. Herweg, Fabian & Müller, Daniel, 2016. "Discriminatory nonlinear pricing, fixed costs, and welfare in intermediate-goods markets," International Journal of Industrial Organization, Elsevier, pages 107-136.
    4. Cantor Vargas, Natalia & Herrera Saavedra, Juan Pablo & Campo Robledo, Jacobo & Lis-Gutiérrez, Jenny-Paola, 2013. "Una propuesta metodológica de discriminación de segundo grado: el caso de tarifas multiclase para el registro marcario en Colombia durante el año 2012
      [A methodological proposal for second-degree p
      ," MPRA Paper 46271, University Library of Munich, Germany.
    5. 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.
    6. Gianpaolo Rossini & Cecilia Vergari, 2014. "The Discrete Charm of Uniform Linear Pricing of an Input Production Joint Venture," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 8(2), pages 68-83, October.
    7. repec:eee:transb:v:104:y:2017:i:c:p:483-500 is not listed on IDEAS
    8. Steffen Hoernig & Ingo Vogelsang, 2012. "The Ambivalence of Two-Part Tariffs for Bottleneck Access," FEUNL Working Paper Series wp568, Universidade Nova de Lisboa, Faculdade de Economia.
    9. Ramon Fauli-Oller & Joel Sandonis, 2016. "Welfare Effects Of Downstream Mergers And Upstream Market Concentration," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(05), pages 1-16, December.
    10. 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.
    11. Takeshi Ebina & Noriaki Matsushima, 2017. "Product differentiation and entry timing in a continuous-time spatial competition model with vertical relations," ISER Discussion Paper 1009, Institute of Social and Economic Research, Osaka University.
    12. Adachi, Takanori & Ebina, Takeshi, 2014. "Cost pass-through and inverse demand curvature in vertical relationships with upstream and downstream competition," Economics Letters, Elsevier, vol. 124(3), pages 465-468.
    13. 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.
    14. 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.
    15. repec:bla:jindec:v:65:y:2017:i:3:p:585-596 is not listed on IDEAS
    16. 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).
    17. Ioannis N. Pinopoulos, 2017. "Input price discrimination and upstream R&D investments," Discussion Paper Series 2017_06, Department of Economics, University of Macedonia, revised Jun 2017.
    18. Li, Youping, 2011. "Timing of investments and third degree price discrimination in intermediate good markets," MPRA Paper 36746, University Library of Munich, Germany.
    19. Li, Youping, 2013. "Timing of investments and third degree price discrimination in intermediate good markets," Economics Letters, Elsevier, vol. 121(2), pages 316-320.
    20. 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.
    21. Inderst, Roman & Shaffer, Greg, 2011. "Wholesale Price Determination Under the Threat of Demand-Side Substitution," MPRA Paper 53843, University Library of Munich, Germany.
    22. Alexandrov, Alexei & Deb, Joyee, 2012. "Price discrimination and investment incentives," International Journal of Industrial Organization, Elsevier, pages 615-623.
    23. Ioannis Pinopoulos, 2017. "Input price discrimination, two-part tariff contracts and bargaining," Discussion Paper Series 2017_01, Department of Economics, University of Macedonia, revised Jan 2017.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:randje:v:40:y:2009:i:4:p:658-672. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/randdus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.