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

  • Roman Inderst
  • Greg Shaffer

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.

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Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 40 (2009)
Issue (Month): 4 ()
Pages: 658-672

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