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INPUT PRICE DISCRIMINATION WHEN BUYERS OPERATE IN MULTIPLE MARKETS

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  • *The authors thank the Editor, two anonymous referees, John Christensen, Peter Christensen, John Fellingham, Hans Frimor, Bjorn Jorgensen, Carolyn Levine, Thomas Pfeiffer, Stefan Reichelstein, David Sappington, Doug Schroeder and Dae-Hee Yoon for helpful comments and suggestions. Anil Arya gratefully acknowledges financial assistance from the John J. Gerlach Chair.

Abstract

This paper revisits third-degree price discrimination when input buyers serve multiple product markets. Such circumstances are prevalent since buyers often use the same input to produce different outputs, and even homogenous outputs are routinely sold through different locations. The typical view is that price discrimination stifles efficiency (and welfare) by resulting in price concessions to less efficient firms. When buyers serve multiple markets, price discrimination leads to price breaks for firms in markets with lower demand. When lower demand markets also have less competition, price discrimination can provide welfare gains by shifting output to less competitive markets.

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