Price Discrimination in Input Markets: Downstream Entry and Efficiency

27 Pages Posted: 5 Jul 2012  

Fabian Herweg

University of Bayreuth - Faculty of Law, Business and Economics

Daniel Müller

University of Bonn

Date Written: Fall 2012

Abstract

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.

Suggested Citation

Herweg, Fabian and Müller, Daniel, Price Discrimination in Input Markets: Downstream Entry and Efficiency (Fall 2012). Journal of Economics & Management Strategy, Vol. 21, Issue 3, pp. 773-799, 2012. Available at SSRN: https://ssrn.com/abstract=2100708 or http://dx.doi.org/10.1111/j.1530-9134.2012.00344.x

Fabian Herweg (Contact Author)

University of Bayreuth - Faculty of Law, Business and Economics ( email )

Universitätsstraße 30
Bayreuth, 95447
Germany

Daniel Müller

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

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