Wholesale Market Power and the Limited Profitability of Retail Zone Pricing

Jeff Thurk, Eugenio Miravete and Katja Seim
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Eugenio Miravete: University of Texas at Austin
Katja Seim: University of Pennsylvania

No 1146, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We present a general analysis of third-degree price discrimination in vertical markets. We show that downstream third-degree price discrimination impacts upstream demand, thereby leading the upstream firm to modify its pricing decision which in turn impacts downstream costs. We show this response not only reduces the profitability of downstream third-degree price discrimination, it also means the relative demand curvature condition of Aguirre, Cowan, & Vickers (AER 2010) is no longer sufficient for price discrimination to increase welfare. Numerical experiments indicate the strategic behavior of upstream firms can have a large adverse effect on downstream profits and consumer welfare.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1146

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