The welfare effects of third-degree price discrimination in intermediate good markets: the case of bargaining


  • The views expressed herein are my own and do not purport to represent the views of the Federal Trade Commission (FTC) or any commis1sioner. I thank George Deltas, Ian Gale, Dan Gaynor, Steve Matthews, John Panzar, Greg Shaffer, Dave Schmidt, Abraham Wickelgren, and seminar participants at Northwestern University and the University of Michigan for helpful comments. I also thank the editor and two anonymous referees for suggestions that improved the article. I take full responsibility for any errors.


This article examines the welfare effects of third-degree price discrimination by a monopolist selling to downstream firms with bargaining power. One of the downstream firms (the “chain store”) can integrate backward at lower cost than rivals. Bargaining powers also depend on disagreement profits, bargaining weights, and concession costs. If the chain's integration threat is not credible, price discrimination reduces the input price charged symmetric downstream firms and often reduces the average input price charged asymmetric downstream firms.