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Price Discrimination in Input Markets: Quantity Discounts and Private Information

Authors


  • We thank the editor David P. Myatt, three anonymous referees, Frago Kourandi, Matthias Kräkel, Patrick Legros, Takeshi Murooka, Peng Peng, Markus Reisinger, Claudia Salim, Klaus M. Schmidt, Patrick Schmitz and Nikolaos Vettas for helpful comments and suggestions. Furthermore, we benefited from comments made by conference audiences at the CESifo Conference Applied Microeconomics (Munich), EARIE (Stockholm), the SFB Meeting (Tutzing), the ANR-DFG Workshop on Market Power in Vertically Related Markets (Paris) as well as seminar audiences at the University of Toulouse, the Humboldt University – Berlin, the Université Libre de Bruxelles, the Otto Beisheim School of Management – Vallendar, ETH Zurich, and the University of Bamberg. Herweg gratefully acknowledges financial support from the Deutsche Forschungsgemeinschaft through SFB/TR-15. All errors are of course our own.

Abstract

We consider a monopolistic supplier's optimal choice of wholesale tariffs when downstream firms are privately informed about their retail costs. Under discriminatory pricing, downstream firms that differ in their ex ante distribution of retail costs are offered different tariffs. Under uniform pricing, the same wholesale tariff is offered to all downstream firms. In contrast to the extant literature on price discrimination with non-linear wholesale tariffs, we find that banning discriminatory wholesale contracts often improves welfare. This also holds if the manufacturer is not an unconstrained monopolist. Moreover, uniform pricing increases downstream investments in cost reduction in the long run.

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