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Price Discrimination in Input Markets

Author

Listed:
  • Roman Inderst

    () (London School of Economics & Political Science)

  • Tommaso Valletti

    () (Imperial College London, University of Rome "Tor Vergata" and CEPR)

Abstract

We analyze the short- and long-run implications of third-degree price discrimination in input markets where downstream firms differ in their efficiency. In contrast to the extant literature, where the supplier is typically an unconstrained monopolist, in our model input prices are constrained by the potential for demand-side substitution. This modification has far-reaching consequences. We show that more efficient firms receive lower input prices under price discrimination, and that the imposition of uniform pricing could stifle incentives to reduce own marginal costs. If downstream firms compete in the same market, we also find a waterbed effect, in that a reduction in a firm's own marginal costs not only reduces its own input price, but increases the input price of its competitors.

Suggested Citation

  • Roman Inderst & Tommaso Valletti, 2006. "Price Discrimination in Input Markets," CEIS Research Paper 73, Tor Vergata University, CEIS.
  • Handle: RePEc:rtv:ceisrp:73
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    References listed on IDEAS

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    More about this item

    Keywords

    Price Discrimination; Uniform Pricing; Input Market;

    JEL classification:

    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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