Discriminatory nonlinear pricing, fixed costs, and welfare in intermediate-goods markets

Fabian Herweg () and Daniel Müller

International Journal of Industrial Organization, 2016, vol. 46, issue C, 107-136

Abstract: We investigate the welfare effects of third-degree price discrimination in input markets when nonlinear wholesale tariffs are feasible. After accepting their respective wholesale contracts, two downstream firms have to pay a fixed cost in order to become active in the downstream market. If the downstream firm with lower marginal cost has significantly higher fixed cost, uniform pricing leads to lower marginal wholesale prices for all downstream firms and thus higher quantities of the final product being produced. This in turn implies that banning price discrimination improves welfare and consumer surplus. If the downstream firm with lower marginal cost has only weakly higher (or even lower) fixed cost, banning price discrimination deteriorates welfare and consumer surplus.

Keywords: Fixed cost; Third-degree price discrimination; Two-part tariffs; Vertical relations (search for similar items in EconPapers)
JEL-codes: D43 K21 L11 L42 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:46:y:2016:i:c:p:107-136

DOI: 10.1016/j.ijindorg.2016.04.001

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