Market power, price discrimination, and allocative efficiency in intermediate-goods markets

Roman Inderst, Greg Shaffer

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61 Citations (Scopus)


We consider a monopolistic supplier's optimal choice of two-part tariff contracts when downstream firms are asymmetric. We find that the optimal discriminatory contracts amplify differences in downstream firms' competitiveness. Firms that are larger—either because they are more efficient or because they sell a superior product—obtain a lower wholesale price than their rivals. This increases allocative efficiency by favoring the more productive firms. In contrast, we show that a ban on price discrimination reduces allocative efficiency and can lead to higher wholesale prices for all firms. As a result, consumer surplus, industry profits, and welfare are lower.
Original languageEnglish
Pages (from-to)658-672
Number of pages15
JournalThe RAND Journal of Economics
Issue number4
Publication statusPublished - 2009

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