WHOLESALE PRICING WHEN BUYERS ARE ASYMMETRIC COURNOT COMPETITORS*

Abstract

This paper focuses on the pricing policy of a well-informed profit- maximizing producer selling to asymmetric retailers who compete a la Cournot. An optimal upstream two-part tariff implies the exit of the inefficient retailer, thus causing downstream monopolization. When this would bring about a significant increase in the efficient retailer's bargaining power, as is plausible, the producer will try to avoid this and consequently choose a pricing scheme that does not cause downstream monopolization. When this is the case, two alternatives emerge: a two-part tariff (ensuring no downstream monopolization) or third-degree price discrimination. The more asymmetric in cost retailers are (consistent with no downstream monopolization), the more likely it is to see third-degree price discrimination as the equilibrium wholesale pricing. When third-degree price discrimination is implemented, a welfare loss is easily produced.