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Optional linear input prices in vertical relations

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  • Salim, Claudia

Abstract

This paper examines how the option of a regulated linear input price affects vertical contracting, where a monopolistic upstream supplier sequentially offers supply contracts to two symmetric downstream firms. We find that equilibrium contracts vary with production cost and regulated price level: If the regulated price is not too high, the option allows for price discrimination, but prevents foreclosure in the intermediary market. Indeed, if both cost and optional price are rather low, non-discriminatory input prices below cost may arise. Optional input prices are socially more desirable than a flat ban on price discrimination, as consumers benefit from more intense downstream competition.

Suggested Citation

  • Salim, Claudia, 2009. "Optional linear input prices in vertical relations," Discussion Papers 2009/4, Free University Berlin, School of Business & Economics.
  • Handle: RePEc:zbw:fubsbe:20094
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    References listed on IDEAS

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    1. de Fontenay, Catherine C. & Gans, Joshua S., 2005. "Optional fixed fees in multilateral vertical relations," Economics Letters, Elsevier, vol. 88(2), pages 184-189, August.
    2. Pio Baake & Ulrich Kamecke & Hans-Theo Normann, 2001. "Vertical Integration and Market Foreclosure with Convex Downstream Costs," Discussion Papers of DIW Berlin 260, DIW Berlin, German Institute for Economic Research.
    3. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
    4. R. Preston McAfee & Marius Schwartz, 2004. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity: Reply," American Economic Review, American Economic Association, vol. 94(3), pages 802-803, June.
    5. Daniel P. O'Brien & Greg Shaffer, 1992. "Vertical Control with Bilateral Contracts," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 299-308, Autumn.
    6. Rey, Patrick & Tirole, Jean, 2007. "A Primer on Foreclosure," Handbook of Industrial Organization, Elsevier.
    7. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-230, March.
    8. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, Elsevier.
    9. King, Stephen P. & Maddock, Rodney, 1999. "Light-handed regulation of access in Australia: negotiation with arbitration," Information Economics and Policy, Elsevier, vol. 11(1), pages 1-22, March.
    10. DeGraba, Patrick, 1990. "Input Market Price Discrimination and the Choice of Technology," American Economic Review, American Economic Association, vol. 80(5), pages 1246-1253, December.
    11. Marx, Leslie M. & Shaffer, Greg, 2004. "Opportunism and menus of two-part tariffs," International Journal of Industrial Organization, Elsevier, vol. 22(10), pages 1399-1414, December.
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    More about this item

    Keywords

    Price discrimination; vertical contracting; exclusion; regulatory outside option;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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