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Price Discrimination in Input Markets: Downstream Entry and Efficiency
Author(s) -
Herweg Fabian,
Müller Daniel
Publication year - 2012
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2012.00344.x
Subject(s) - downstream (manufacturing) , inefficiency , upstream (networking) , welfare , extant taxon , price discrimination , economics , production (economics) , market structure , microeconomics , industrial organization , monetary economics , market economy , operations management , evolutionary biology , biology , computer network , computer science
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.