Price Discrimination in Input Markets: Downstream Entry and Welfare

Fabian Herweg () and Daniel Müller

No 06/2010, Bonn Econ Discussion Papers from University of Bonn, Bonn Graduate School of Economics (BGSE)

Abstract: The extant theory on price discrimination in input markets takes the structure of the intermediate industry as exogenously given. This paper endogenizes the structure of the intermediate industry and examines the effects of banning third-degree price discrimination on market structure and welfare. We identify situations where banning price discrimination leads to either higher or lower prices for all downstream firms. These findings are driven by the fact that upstream profits are discontinuous due to entry being costly. Moreover, permitting price discrimination fosters entry which in many cases improves welfare. Nevertheless, entry can also reduce welfare because it may lead to a severe inefficiency in production.

Keywords: Entry; Input Markets; Market Structure; Price Discrimination; Vertical Contracting (search for similar items in EconPapers)
JEL-codes: D43 L11 L42 (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bonedp:062010

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