Input Price Discrimination Research Articles

Price Discrimination in Input Markets and Quality Differentiation

This paper examines the welfare implications of input price discrimination in a vertically-related market, which is composed of a monopolistic upstream market and a duopolistic downstream market. The downstream duopolists produce quality-differentiated products at different marginal costs. We show that the equilibrium input prices are closely related to the downstream quality gap and cost difference. When the monopolist simply charges a unit wholesale price for its input product, discriminatory pricing could be socially desirable even though the aggregate output remains unchanged. Nevertheless, if a two-part tariff is feasible, then banning price discrimination could increase the aggregate output and social welfare.

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

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.

The Tragedy of the Advertising Commons and Input Price Discrimination: Who Pays for the Advertising Costs?

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.

Sequential Licensing and Input Price Discrimination

Sequential Licensing and Input Price Discrimination

Raising rivals’ cost through buyer power

We re-examine the view that a ban on price discrimination in input markets is particularly desirable in the presence of buyer power. This argument crucially depends on an inverse relationship between downstream firms’ profits and the uniform input price. Assuming different input efficiencies among downstream firms, we derive a necessary and sufficient condition such that a higher input price benefits a subset of relatively efficient downstream firms. In such instances, consumers may be better off if discriminatory pricing is feasible.

Spatial Price Discrimination in Input Markets with an Endogenous Market Boundary

This paper examines the welfare effect of third-degree price discrimination in a vertically related market with one upstream monopolist that sells its input to a continuum of downstream markets. Assume that the market boundary of the monopolist is endogenously determined. It is found that social welfare is necessarily lower under discriminatory than uniform pricing, even if the market area of the former is greater than that of the latter. This finding is contrary to that in the extant literature on price discrimination in final goods markets.

Price Discrimination in Input Markets: Quantity Discounts and Private Information

We consider a monopolistic supplier's optimal choice of wholesale tariffs when downstream firms are privately informed about their retail costs. Under discriminatory pricing, downstream firms that differ in their ex ante distribution of retail costs are offered different tariffs. Under uniform pricing, the same wholesale tariff is offered to all downstream firms. In contrast to the extant literature on price discrimination with non‐linear wholesale tariffs, we find that banning discriminatory wholesale contracts often improves welfare. This also holds if the manufacturer is not an unconstrained monopolist. Moreover, uniform pricing increases downstream investments in cost reduction in the long run.

Price Discrimination in Input Markets: Quantity Discounts and Private Information

We consider a monopolistic supplier’s optimal choice of wholesale tariffs when downstream firms are privately informed about their retail costs. Under discriminatory pricing, downstream firms that differ in their ex ante distribution of retail costs are offered different tariffs. Under uniform pricing, the same wholesale tariff is offered to all downstream firms. In contrast to the extant literature on thirddegree price discrimination with nonlinear wholesale tariffs, we find that banning discriminatory wholesale contracts—the usual legal practice in the EU and US— often is beneficial for social welfare. This result is shown to be robust even when the upstream supplier faces competition in the form of fringe supply.

Production efficiency, input price discrimination, and social welfare

This paper re-examines the welfare implications of input price discrimination by considering the possibility of the structural change in the final goods market. When the marginal cost difference is moderate, price discrimination is more socially desirable as the upstream firm serves more downstream firms under price discrimination than uniform pricing. Surprisingly, when the marginal cost difference is sufficiently large, although the upstream monopolist serves more downstream firms and more outputs are produced under price discrimination than uniform pricing, the social welfare is lower under price discrimination. This result runs against those prevailing in the literature without market structural change.

Price Discrimination in Input Markets: Downstream Entry and Efficiency

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

Price discrimination in input markets

We analyze the short‐ and long‐run implications of third‐degree price discrimination in input markets. In contrast to the extant literature, which typically assumes that the supplier is an unconstrained monopolist, in our model input prices are constrained by the threat of demand‐side substitution. In our model, the more efficient buyer receives a discount. A ban on price discrimination thus benefits smaller but hurts more efficient, larger firms. It also stifles incentives to invest and innovate. With linear demand, a ban on price discrimination benefits consumers in the short run but reduces consumer surplus in the long run, which is once again the opposite of what is found without the threat of demand‐side substitution.

Upstream and downstream pollution taxations in vertically related markets with imperfect competition

When two markets are vertically related, the government can control pollution at the upstream as well as the downstream market levels. This paper employs the stylized model of input price discrimination and compares the effectiveness of upstream and downstream pollution taxations. We consider the situation in which downstream firms have heterogeneous abatement technologies and an upstream monopolist performs input price discrimination against them. In order to mitigate pollution, the government imposes input tax on the intermediate inputs and emission tax on the pollutant. We show that the degree of input price discrimination decreases with a rise in the input tax and increases with a rise in the emission tax. We further examine the effect of a green tax reform in which the government changes the source of taxation from input tax to emission tax. We argue that although this green tax reform may reduce the tax revenue of the government, it will certainly increase social welfare.

Price Discrimination in Input Markets

We analyze the short- and long-run implications of third-degree price discrimination in input markets where downstream firms differ in their efficiency. In contrast to the extant literature, where the supplier is typically an unconstrained monopolist, in our model input prices are constrained by the potential for demand-side substitution. This modification has far-reaching consequences. We show that more efficient firms receive lower input prices under price discrimination, and that the imposition of uniform pricing could stifle incentives to reduce own marginal costs. If downstream firms compete in the same market, we also find a waterbed effect, in that a reduction in a firm's own marginal costs not only reduces its own input price, but increases the input price of its competitors.

Input price discrimination with downstream Cournot competitors

This paper addresses third-degree price discrimination in input markets. I decompose the upstream monopolist’s profit into two parts, one that depends on average input prices, and one that depends on their distribution. This decomposition is useful in comparing the welfare properties of price discrimination against uniform pricing. Under reasonable assumptions, input price discrimination negatively affects both consumer surplus and total welfare.

Third-Degree Price Discrimination in Input Markets: Output and Welfare

If price discrimination is realized, the economy shifts from one equilibrium to another. It clearly involves welfare effects: The price-discriminator clearly gains, some consumers may also gain from the price cut, but others may lose faced with higher prices, etc. Traditionally the change in social welfare is known to be closely related to the change in total output. In the case of third-degree price discrimination, it is well known that an increase in total output is a necessary condition for welfare improvement. Richard Schmalensee (1981) proves this fact in a model in which the monopolist with constant marginal cost can perfectly separate markets. Further, Hal R. Varian (1985) extends this result to the case of interdependent markets, permnitting increasing marginal cost of the monopolist. And finally, the assumption of nondecreasing marginal cost is eliminated by Marius Schwartz (1990). Roughly speaking, this proposition says that if there is a welfare gain from price discrimination, there has to be some gain to offset the distortion involved. On the other hand, the vast majority of legal and other policy disputes over the price discrimination concern input markets, not final good markets. Thus, it seems important to investigate the situation in which a discriminating monopolist is not a final good supplier but an input supplier, and the buyers of the input are downstream producers of a final good, as is assumed in this paper. If the downstream firms have different technologies, their input demand functions will be different, and thus the monopolist has an incentive to price-discriminate. In this scenario, Michael L. Katz (1987) and Patrick DeGraba (1990) study the effect of inputmarket price discrimination, and show that price discrimination always lowers welfare because it involves the distortion that a lower-cost downstream firm is assigned a higher price. Unfortunately, in their simple settings on the technology of downstream industry, price discrimination can never change total output (of the input or of the final good).1 Thus we must say that welfare effect of input-market price discrimination remains open to question if it has some effect on total output. In particular, we are curious as to whether we can obtain some close relationship between the changes in welfare and total output as we have obtained in the final good market settings. With this motivation, we will construct a model which involves change in total output (of the final good). In the next section, the model and assumptions are provided. In Section II, after we extend the result of Katz (1987) and DeGraba (1990), we find a relationship between the changes in welfare and total output. Strikingly, it states that an increase in the total output of the final good is a sufficient condition for welfare deterioration. This result contrasts with that obtained by Schmalensee (1981), Varian (1985), and Schwartz (1990) from usual models of price discrimination in a final good market. Section III concludes the analysis.

Price Discrimination in Input–Output

Modern economies are characterized by a great variety of pricing rules. Therefore, the commodities' prices and the primay factors' prices are discriminated in reality. However, in practical input–output tables, as well as in theoy, the prices are uniform and relative. In this work, an input–output model is described with absolute and different prices for final uses commodities and production's primay factors (wages, profits, etc.). In this case, the economic relationships are based on the commodities' demand curves for all the categories of final uses, and the factors' supply curves for all production's branches. In this way, we can establish the linkage and the feedback between factors' prices and quantities, and final uses commodities' prices and quantities. This is obtained by a novel interpretation of input–output, which approximates reality better.