Price Discrimination in Input Markets

43 Pages Posted: 21 Mar 2006

See all articles by Roman Inderst

Roman Inderst

Goethe University Frankfurt

Tommaso M. Valletti

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Date Written: March 2006

Abstract

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.

Keywords: Price Discrimination, Uniform Pricing, Input Market

JEL Classification: K21, L13, L42

Suggested Citation

Inderst, Roman and Valletti, Tommaso M., Price Discrimination in Input Markets (March 2006). Available at SSRN: https://ssrn.com/abstract=889243 or http://dx.doi.org/10.2139/ssrn.889243

Roman Inderst

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60629
Germany
+49 (69) 798-34601 (Phone)
+49 (69) 798-35000 (Fax)

HOME PAGE: http://www.wiwi.uni-frankfurt.de/en/departments/finance/lehrstuhl/prof-dr-roman-inderst/team

Tommaso M. Valletti (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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