WHOLESALE PRICING WHEN BUYERS ARE ASYMMETRIC COURNOT COMPETITORS*

Giuseppe Colangelo

Manchester School, 2006, vol. 74, issue 2, 156-169

Abstract: This paper focuses on the pricing policy of a well‐informed profit‐ maximizing producer selling to asymmetric retailers who compete à la Cournot. An optimal upstream two‐part tariff implies the exit of the inefficient retailer, thus causing downstream monopolization. When this would bring about a significant increase in the efficient retailer's bargaining power, as is plausible, the producer will try to avoid this and consequently choose a pricing scheme that does not cause downstream monopolization. When this is the case, two alternatives emerge: a two‐part tariff (ensuring no downstream monopolization) or third‐degree price discrimination. The more asymmetric in cost retailers are (consistent with no downstream monopolization), the more likely it is to see third‐degree price discrimination as the equilibrium wholesale pricing. When third‐degree price discrimination is implemented, a welfare loss is easily produced.

Date: 2006
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