Third-Degree Price Discrimination in Oligopoly with Endogenous Input Costs

21 Pages Posted: 18 Feb 2021

See all articles by Jeanine Miklós-Thal

Jeanine Miklós-Thal

University of Rochester - Simon Business School

Greg Shaffer

University of Rochester - Simon Business School

Date Written: January 20, 2021

Abstract

This paper examines the output effect of third-degree price discrimination in symmetrically differentiated oligopoly. We find that when the sellers' input costs are chosen endogenously by an upstream supplier with market power, as opposed to being fixed exogenously, long-standing qualitative conclusions about the effect of price discrimination on aggregate output can be reversed. In contrast to previous findings (e.g., by Holmes 1989), more intense competition in the strong market than in the weak market can make it less likely that price discrimination raises aggregate output. For linear demand functions, we establish necessary and sufficient conditions under which the output effect changes sign when input costs are endogenized.

Keywords: third-degree price discrimination, oligopoly, vertical contracting, diversion ratios

JEL Classification: L11, L13, L42, D40, D42, D43, D60

Suggested Citation

Miklós-Thal, Jeanine and Shaffer, Greg, Third-Degree Price Discrimination in Oligopoly with Endogenous Input Costs (January 20, 2021). Available at SSRN: https://ssrn.com/abstract=3771654 or http://dx.doi.org/10.2139/ssrn.3771654

Jeanine Miklós-Thal (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Greg Shaffer

University of Rochester - Simon Business School ( email )

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