Monday, January 12, 2009
Posted by D. Daniel Sokol
Barick Chung (Department of Economics, Chinese University of Hong Kong) and Eric Rasmusen (Department of Business Economics and Public Policy, Indiana University Kelley School of Business) discuss Price Discrimination between Retailers with and without Market Power in their latest working paper.
ABSTRACT: Some retail markets are more competitive than others. A manufacturer with market power in the wholesale market who sells his product to competing retailers in cities and monopolistic ones in each of various towns must set the wholesale price difference between towns and cities to be smaller than the transportation cost to prevent “grey market” arbitrage. If he uses linear pricing, the town retail price will be even higher than under single-retailer double marginalization. Two-part tariffs do not solve the problem as they would if there were a single retailer, because the wholesale unit price must be higher than marginal cost to prevent arbitrage to the cities. If transportation costs are low, price discrimination is difficult and two- part tariffs come to resemble inefficient linear monopoly pricing. High transportation costs allow greater efficiency in contracting, and this can outweigh the negative direct effect on welfare.