Price Discrimination in Input Markets When Retailers Have Replacement Threats: Empirical Evidence
46 Pages Posted: 7 Jul 2020 Last revised: 31 Aug 2020
Date Written: September 12, 2019
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.
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