Friday, August 30, 2013

Input price discrimination (bans), entry and welfare

Posted by D. Daniel Sokol

Markus Dertwinkel-Kalt, Justus Haucap, Christian Wey (all Dusseldorf Institute for Competition Economics) analyze Input price discrimination (bans), entry and welfare.

ABSTRACT: Katz (1987), DeGraba (1990), and Yoshida (2000) have formulated theories that price discrimination bans in intermediary goods markets tend to have positive effects on allocative, dynamic and productive efficiency, respectively. We show that none of these results is robust vis-a-vis endogenous changes in downstream market structure. An upstream monopolist’s ability to price discriminate can intensify competition through entry (by a technically inefficient entrant), resulting in socially preferable market outcomes. In contrast, discrimination bans tend to blockade entry of relatively inefficient fi…rms, thereby strengthening downstream market concentration.

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