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Differential Pricing in Intermediate Good Markets
Author(s) -
Li Youping
Publication year - 2017
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/joie.12140
Subject(s) - price discrimination , upstream (networking) , downstream (manufacturing) , microeconomics , differential (mechanical device) , production (economics) , economics , production cost , social welfare , average cost pricing , final good , welfare , industrial organization , business , rational pricing , econometrics , computer science , market economy , operations management , mechanical engineering , computer network , law , political science , engineering , aerospace engineering , capital asset pricing model
This paper studies differential pricing by an upstream monopolist whose cost to supply the intermediate good differs across buyers in the downstream. It is shown that, different from demand‐based price discrimination, cost‐based differential pricing shifts production efficiently. If total output (and consumer welfare) is weakly increased under differential pricing as opposed to uniform pricing, as is true for weakly convex final market demand functions, social welfare is strictly improved. The analysis is extended to the case in which both the upstream monopolist's cost to serve the downstream firms and the downstream firms’ cost to produce the final good differ.