Input price discrimination (bans), entry and welfare

Posted by D. Daniel Sokol

Markus Dertwinkel-Kalt, Justus Haucap, Ruhr-University of Bochum and Christian Wey, DIW discuss 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-à-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 firms , thereby strengthening downstream market concentration.