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Input price discrimination, two-part tariff contracts and bargaining

Ioannis Pinopoulos

Discussion Paper Series from Department of Economics, University of Macedonia

Abstract: We consider an upstream supplier who bargains with two cost-asymmetric downstream firms over the terms of interim observable two-part tariff contracts: contracts are initially secret (acceptance decisions are based on beliefs) but downstream firms observe the accepted contract terms before competing in prices. We show that the more efficient downstream firm pays a higher input price than its less efficient rival, a finding that is in stark contrast to the previous findings in the literature on input price discrimination with two-part tariff contracts. We also show that a ban on input price discrimination will reduce both consumer and total welfare when the upstream supplier bargains the common two-part tariff contract with the less efficient firm. This result is interesting from a policy perspective since it implies that even though under discriminatory input prices the upstream supplier favors the “wrong” firm, non-discriminatory input pricing can make things even worse in terms of welfare.

Keywords: Vertical relations; input price discrimination; two-part tariffs; bargaining; welfare. (search for similar items in EconPapers)
JEL-codes: D4 L1 L4 (search for similar items in EconPapers)
Date: 2017-01, Revised 2017-01
New Economics Papers: this item is included in nep-bec, nep-com, nep-cta and nep-mic
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