Price Discrimination in Input Markets

Roman Inderst and Tommaso Valletti

CEIS Research Paper from Tor Vergata University, CEIS

Abstract: We analyze the short- and long-run implications of third-degree price discrimination in input markets where downstream firms differ in their efficiency. In contrast to the extant literature, where the supplier is typically an unconstrained monopolist, in our model input prices are constrained by the potential for demand-side substitution. This modification has far-reaching consequences. We show that more efficient firms receive lower input prices under price discrimination, and that the imposition of uniform pricing could stifle incentives to reduce own marginal costs. If downstream firms compete in the same market, we also find a waterbed effect, in that a reduction in a firm's own marginal costs not only reduces its own input price, but increases the input price of its competitors.

Keywords: Price Discrimination; Uniform Pricing; Input Market (search for similar items in EconPapers)
JEL-codes: K21 L13 L42 (search for similar items in EconPapers)
Pages: 28
Date: 2006-07-01
New Economics Papers: this item is included in nep-com, nep-ind, nep-law and nep-mic
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Citations: View citations in EconPapers (4)

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Journal Article: Price discrimination in input markets (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:rtv:ceisrp:73

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