Tuesday, September 18, 2018
Jeanine Miklós-Thal University of Rochester - Simon Business School and Greg Shaffer University of Rochester - Simon Business School study Input Price Discrimination by Resale Market.
ABSTRACT: This paper analyzes the drivers and welfare effects of supply contracts that discriminate between resale in different markets. In a game between a supplier and competing downstream firms that resell the supplier's input in multiple (independent or interdependent) markets, we show that, all else equal, the supplier wants to discriminate against resale in the market with more intense downstream competition. Unlike monopolistic third-degree price discrimination in final-goods markets, input price discrimination by resale market can have a positive allocation effect, which implies that welfare can rise with discrimination even if total output decreases. The output effect of input price discrimination by resale market, in turn, is shown to depend on the competitive pass-through rates and on the curvatures of the demand functions. Our insights are relevant for the policy treatment of vertical restraints on online sales.