Discriminatory nonlinear pricing, fixed costs, and welfare in intermediate-goods markets

Abstract

We investigate the welfare effects of third-degree price discrimination in input markets when nonlinear wholesale tariffs are feasible. After accepting their respective wholesale contracts, two downstream firms have to pay a fixed cost in order to become active in the downstream market. If the downstream firm with lower marginal cost has significantly higher fixed cost, uniform pricing leads to lower marginal wholesale prices for all downstream firms and thus higher quantities of the final product being produced. This in turn implies that banning price discrimination improves welfare and consumer surplus. If the downstream firm with lower marginal cost has only weakly higher (or even lower) fixed cost, banning price discrimination deteriorates welfare and consumer surplus.