Timing of investments and third degree price discrimination in intermediate good markets
We study third degree price discrimination in intermediate good markets, in which costs of production for the downstream firms are determined by their investment choices. We focus on the effect of the sequence of firm actions and analyze two models with different timing of investments, before or after the upstream monopolist sets the input prices. When investments are determined after the prices are set, an indirect effect of input prices on the derived demand from downstream firms must be taken into account, due to the change of investment incentives. This causes the upstream firm to possibly charge the more efficient downstream firm a lower price, a result contrasting previous findings. Using linear demand and quadratic investment costs, we show that not only the downstream firms but also the upstream monopolist prefers the sequence of play in the latter model, i.e., it benefits from committing to prices before investments are undertaken. A change of timing from the first model to the second constitutes a strict Pareto improvement.
|Date of creation:||Sep 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Schmalensee, Richard., 1980.
"Output and welfare implications of monopolistic third-degree price discrimination,"
1095-80., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Schmalensee, Richard, 1981. "Output and Welfare Implications of Monopolistic Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 71(1), pages 242-47, March.
- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
- Simon Cowan, 2007.
"The welfare effects of third-degree price discrimination with non-linear demand functions,"
Economics Series Working Papers
364, University of Oxford, Department of Economics.
- Simon Cowan, 2007. "The welfare effects of third-degree price discrimination with nonlinear demand functions," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 419-428, 06.
- Roman Inderst & Tommaso Valletti, 2009.
"Price discrimination in input markets,"
RAND Journal of Economics,
RAND Corporation, vol. 40(1), pages 1-19.
- Malueg, David A, 1993. "Bounding the Welfare Effects of Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 83(4), pages 1011-21, September.
- Yoshihiro Yoshida, 2000. "Third-Degree Price Discrimination in Input Markets: Output and Welfare," American Economic Review, American Economic Association, vol. 90(1), pages 240-246, March.
- Schwartz, Marius, 1990. "Third-Degree Price Discrimination and Output: Generalizing a Welfare Result," American Economic Review, American Economic Association, vol. 80(5), pages 1259-62, December.
- 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.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:36746. 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: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.