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Excessive supplier pricing and high-quality foreclosure

This article shows that entry of a more input-effcient, but lower quality downstream producer, compared to a high-quality downstream incumbent, might be detrimental to social welfare. In particular, if the entrant is extremely ecient, a monopolist upstream supplier reacts by charging an excessive price, driving the high-quality incumbent out of the market and reducing social welfare. However, despite the entrant's low input requirement, the supplier's profit increases for all but the most effcient entrant technologies. Enabling the supplier to engage in third degree price discrimination may increase social welfare.

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File URL: http://homepage.univie.ac.at/Papers.Econ/RePEc/vie/viennp/vie1303.pdf
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Paper provided by University of Vienna, Department of Economics in its series Vienna Economics Papers with number 1303.

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Date of creation: Mar 2013
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Handle: RePEc:vie:viennp:1303
Contact details of provider: Web page: http://www.univie.ac.at/vwl

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  1. Liebowitz, S J, 1985. "Copying and Indirect Appropriability: Photocopying of Journals," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 945-57, October.
  2. B. Douglas Bernheim & Michael D. Whinston, 1996. "Exclusive Dealing," NBER Working Papers 5666, National Bureau of Economic Research, Inc.
  3. DeGraba, Patrick, 1990. "Input Market Price Discrimination and the Choice of Technology," American Economic Review, American Economic Association, vol. 80(5), pages 1246-53, December.
  4. Varian, Hal R, 2000. "Buying, Sharing and Renting Information Goods," Journal of Industrial Economics, Wiley Blackwell, vol. 48(4), pages 473-88, December.
  5. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  6. P. Crocioni & C. Veljanovski, 2003. "Price squeezes, foreclosure and competition law," Competition and Regulation in Network Industries, Intersentia, vol. 4(1), pages 28-61, September.
  7. Raymond J. Deneckere & R. Preston McAfee, 1996. "Damaged Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 149-174, 06.
  8. Salinger, Michael A, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 345-56, May.
  9. Besen, Stanley M., 1986. "Private copying, reproduction costs, and the supply of intellectual property," Information Economics and Policy, Elsevier, vol. 2(1), pages 5-22.
  10. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-75, September.
  11. Patrick Rey & Jean Tirole, 1985. "The Logic of Vertical Restraints," Working papers 396, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Bakos, Yannis & Brynjolfsson, Erik & Lichtman, Douglas, 1999. "Shared Information Goods," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 117-55, April.
  13. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347.
  14. Hal R. Varian, 2005. "Copying and Copyright," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 121-138, Spring.
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