Input Price Discrimination Research Articles

Distance to frontier, input price discrimination, and downstream R&D

Distance to frontier, input price discrimination, and downstream R&D

Input Price Discrimination in Endogenous Competition Mode

Input Price Discrimination in Endogenous Competition Mode

Input price discrimination by resale market

AbstractThis article analyzes supply tariffs that discriminate between resale in different markets. In a setting with competing retailers that operate in multiple (independent or interdependent) markets, we show that, all else equal, a monopolist supplier wants to discriminate against resale in the market with the higher aggregate cross‐seller diversion ratio. We find that discrimination can improve allocative efficiency and present sufficient conditions, involving the pass‐through rates and the market demand curvatures in the different markets, under which discrimination has positive effects on output and welfare. Our insights are relevant for the policy treatment of vertical restraints on online sales.

Input Price Discrimination and Allocation Efficiency

Input Price Discrimination and Allocation Efficiency

Input price discrimination and non-controlling vertical shareholding

Input price discrimination and non-controlling vertical shareholding

Input price discrimination with passive partial ownership

ABSTRACT Passive partial ownership (PPO) is commonly practised in many industries. When operating profits of stock-owned firms decrease, stock-holding firms will increase output to reduce capital gain through owned firms’ stocks. In a vertically related market with downstream PPO, consumer and total surpluses when input price discrimination is allowed may be larger than when it is banned because PPO mitigates effects of reduction in output caused by higher input price.

The Mode of Technology Licensing and Input Price Discrimination

The Mode of Technology Licensing and Input Price Discrimination

Size-based Input Price Discrimination Under Endogenous Inside Options

Individual retailers may choose to invest in a substitute to a dominant supplier’s products (inside option) as a way of improving its position towards the supplier. Given that a large retailer has stronger investment incentives than a smaller rival, the large retailer may obtain a selective rebate (size-based price discrimination). Yet, we often observe that suppliers do not price discriminate between retailers that differ in size. Why is this so? We argue that the explanation may be related to the competitive pressure among the retailers. The more fiercely the retailers compete, the more each retailer cares about its relative input prices. Other things equal, this implies that the retailers will invest more in the substitute the greater the competitive pressure. We show that if the competitive pressure is sufficiently strong, the supplier can profitably incentivize the retailer to reduce its investments in substitutes by committing to charge a uniform input price. Furthermore, we show that under uniform input pricing, the large retailer may induce smaller rivals to exit the market by strategically underinvesting in inside options.

Size-based Input Price Discrimination Under Endogenous Inside Options

Individual retailers may choose to invest in a substitute to a dominant supplier’s products (inside option) as a way of improving its position towards the supplier. Given that a large retailer has stronger investment incentives than a smaller rival, the large retailer may obtain a selective rebate (size-based price discrimination). Yet, we often observe that suppliers do not price discriminate between retailers that differ in size. Why is this so? We argue that the explanation may be related to the competitive pressure among the retailers. The more fiercely the retailers compete, the more each retailer cares about its relative input prices. Other things equal, this implies that the retailers will invest more in the substitute the greater the competitive pressure. We show that if the competitive pressure is sufficiently strong, the supplier can profitably incentivize the retailer to reduce its investments in substitutes by committing to charge a uniform input price. Furthermore, we show that under uniform input pricing, the large retailer may induce smaller rivals to exit the market by strategically underinvesting in inside options.

Input Price Discrimination and Informative Advertisement Efforts

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 one seller (cost-efficient seller if they are asymmetric) a price discount and charge the other (inefficient seller) a higher fee to clarify the claim on the demand enhanced by informative advertisement and to avoid the under-advertisement problem. Therefore, it may increase aggregate output, consumer surplus, and social surplus- the reverse of the welfare implications in the previous literature.

Price Discrimination in Input Markets When Retailers Have Replacement Threats: Empirical Evidence

Price discrimination in input markets may be driven by differences in buyers’ (i) demands, (ii) costs, or (iii) ‘replacement threats,’ in which a buyer obtains favorable pricing by threatening to source an input from a competitor. I analyze the importance of differences in buyers’ replacement threats for explaining differences in terms of wholesale trade. The empirical application uses data from the U.S. yogurt market. I find that differences in replacement threats are an important determinant of inferred input-market price discrimination. Results suggest that ‘smaller’ buyers, i.e. retailers with fewer products offered and lower revenues in neighboring markets, benefit relatively more from profitable replacement threats.

The Impact of Uniform Pricing Regulations on Incentives to Generate and Disclose Accounting Information

A persistent question in industrial organization is whether regulations restricting price discrimination in input markets can promote efficiency. Despite the extensive study of the economic effects of input pricing regulations, the literature is bereft of an examination of the role of accounting information. In this paper, we seek to fill the gap by modeling the effects of uniform pricing restrictions in input markets on firms’ information generation and disclosure. In doing so, we find that information considerations present an impetus for uniform pricing requirements since they promote incentives for retail firms to both acquire and disclose relevant accounting information. In effect, by shielding retail firms from excessive supplier exploitation, uniform pricing regulations create a richer and more transparent information environment. This, then, leads to welfare gains and even benefits that can accrue naturally to all supply chain partners including the supplier, whose actions are constrained by the uniform pricing regulation. This paper was accepted by Brian Bushee, accounting.

Input Price Discrimination with Horizontal Shareholding

Antitrust laws in many countries prohibit the setting of differential prices across buyers who compete against each other. In this paper, we consider a setting in which a downstream manufacturer holds non-controlling stakes in its rival and both buy input from an unptream monopolist. We find that under price discrimination a lower price is charged to the firm that holds the rival's shares so production is shifted toward it. This dampens the anticompetitive effects of horizontal shareholding and results in higher output, lower final good price, and improved consumer, producer and social welfare relative to uniform pricing.

Input Price Discrimination, Demand Forms, and Welfare

We analyse the effects of input price discrimination in the canonical model where an upstream monopolist sells to downstream firms with various degrees of efficiency. We first recast a series of existing results within our setting, extending previous findings related to discrimination in final-goods markets to the case of discrimination in input markets. Then, we examine the impact of input price discrimination on welfare. A key determinant of the effects of input price discrimination corresponds to the sum of demand curvature and pass-through elasticity. We provide examples relying on derived demands with constant curvature, including demands with constant pass-through rates.

Input price discrimination in the presence of downstream vertical differentiation

This paper investigates the competitive effects of input price discrimination (IPD) in a setting in which an upstream monopolist produces an essential input supplied to the downstream market where there is competition between two vertically differentiated retailers. Two different input pricing regimes are investigated: (i) the uniform pricing regime, in which third-degree input price discrimination is prohibited; and (ii) a discriminatory pricing regime, under which the upstream monopolist may charge different prices to the two downstream firms. We find that despite favoring the low-quality firm, IPD is welfare enhancing if and only if the quality gap is sufficiently high.

Input Price Discrimination and Upstream R&D Investments

We study the welfare effects of input price discrimination when an upstream firm that supplies two cost-asymmetric downstream firms undertakes RD but it always decreases long-run welfare. Thus, with unobservable two-part tariffs, a ban on input price discrimination is detrimental to welfare even when its effect on upstream R&D investments is positive.

Foreign direct investment, input prices, and host country welfare

AbstractThis paper analyzes a multinational firm’s foreign direct investment decision, through either greenfield investment or cross‐border merger and acquisition, into a host country with an input monopoly that adopts either uniform pricing or discriminatory pricing. The optimal foreign entry mode could differ under each pricing policy. Under Cournot competition, firms’ technological gap and the initial local market structure are critical to the choice of foreign entry mode, whereas product substitutability is important under Bertrand competition. In the presence of foreign entry, this paper also examines the welfare effects of input price discrimination for the host country.

수평 차별화된 최종재 시장에서 요소가격차별의 후생효과

We analyze the welfare effect of input price discrimination in a horizontally differentiated final-goods market. Previous studies assuming downstream firms competing with homogeneous goods have shown that input price discrimination lowers social welfare by reducing production efficiency. On the other hand, Hahn and Kim(2018) recently showed that input price discrimination can improve social welfare by increasing consumption and production efficiencies when the final-goods market is vertically or horizontally differentiated and consumers have heterogeneous preferences for the products. In contrast, this paper shows that even if the final goods are spatially differentiated, input price discrimination always reduces social welfare as long as all consumers participate and the participation constraint is binding in the middle of the consumer distribution in equilibrium. This result highlights that the welfare effect of input price discrimination in the differentiated final-goods market critically depends on the type of consumer participation constraint, which provides useful implications for competition policy towards the third-degree price discrimination in intermediate-goods markets.

Input Price Discrimination by Resale Market

This paper analyzes supply tariffs that discriminate between resale in different markets. In a setting with competing retailers that operate in multiple (independent or interdependent) markets, we show that, all else equal, a monopolist supplier wants to discriminate against resale in the market with the higher aggregate cross-seller diversion ratio. We find that discrimination can improve allocative efficiency and present sufficient conditions, involving the pass-through rates and the inverse market demand curvatures in the different markets, under which discrimination has positive effects on output and welfare. Our insights are relevant for the policy treatment of vertical restraints on online sales.

Input price discrimination, technology licensing and social welfare

This paper examines the welfare effect of third-degree input price discrimination in the presence of technology licensing by an outside innovator. It is found that discriminatory pricing induces the innovator to issue more licenses to downstream firms which improves the overall production efficiency of the downstream market and makes discriminatory pricing more socially desirable than uniform pricing. However, if the level of innovation is endogenously determined by the outside innovator, price discrimination suppresses his R&D incentive, which reduces the social welfare and makes the welfare effect of price discrimination ambiguous.