Abstract
This paper examines a monopolistic supplier's optimal decision of input prices when two downstream sellers simultaneously choose their advertisement efforts and, then, output levels. In contrast to the previous literature, it demonstrates that allowing third-degree price discrimination leads the supplier to offer the cost-efficient seller a price discount and charge the other inefficient seller a higher fee to clarify the claim on the demand enhanced by advertisement and to avoid the under-advertisement problem. Therefore, it may increase aggregate output and social surplus - the reverse of the welfare implications in the previous literature.
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