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Optional linear input prices in vertical relations

Claudia Salim

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: This paper examines how the option of a regulated linear input price affects vertical contracting, where a monopolistic upstream supplier sequentially offers supply contracts to two symmetric downstream firms. We find that equilibrium contracts vary with production cost and regulated price level: If the regulated price is not too high, the option allows for price discrimination, but prevents foreclosure in the intermediary market. Indeed, if both cost and optional price are rather low, non-discriminatory input prices below cost may arise. Optional input prices are socially more desirable than a flat ban on price discrimination, as consumers benefit from more intense downstream competition.

Keywords: price discrimination; vertical contracting; exclusion; regulatory outside option (search for similar items in EconPapers)
JEL-codes: D42 L11 L42 (search for similar items in EconPapers)
Date: 2009-04
New Economics Papers: this item is included in nep-com, nep-mic and nep-reg
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