Third-degree price discrimination in oligopoly with endogenous input costs

Abstract

This paper examines the output effect of third-degree price discrimination in symmetrically differentiated oligopoly. We find that when the sellers’ input costs are chosen endogenously by an upstream supplier with market power, as opposed to being fixed exogenously, long-standing qualitative conclusions about the effect of price discrimination on aggregate output can be reversed. In contrast to previous findings (e.g., by Holmes, 1989), more intense competition in the strong market than in the weak market can make it less likely that price discrimination raises aggregate output. For linear demand functions, we establish necessary and sufficient conditions under which the output effect changes sign when input costs are endogenized.