We thank two referees and the editor, Mark Armstrong, as well as seminar participants at Bocconi, EARIE (Amsterdam), the Norwegian Antitrust Authority, the Office of Fair Trading, Southampton, Virginia, and the annual IIO Conference in Washington, DC for helpful comments.
Price discrimination in input markets
Article first published online: 15 JAN 2009
© 2009, RAND
The RAND Journal of Economics
Volume 40, Issue 1, pages 1–19, Spring 2009
How to Cite
Inderst, R. and Valletti, T. (2009), Price discrimination in input markets. The RAND Journal of Economics, 40: 1–19. doi: 10.1111/j.1756-2171.2008.00053.x
- Issue published online: 15 JAN 2009
- Article first published online: 15 JAN 2009
We analyze the short- and long-run implications of third-degree price discrimination in input markets. In contrast to the extant literature, which typically assumes that the supplier is an unconstrained monopolist, in our model input prices are constrained by the threat of demand-side substitution. In our model, the more efficient buyer receives a discount. A ban on price discrimination thus benefits smaller but hurts more efficient, larger firms. It also stifles incentives to invest and innovate. With linear demand, a ban on price discrimination benefits consumers in the short run but reduces consumer surplus in the long run, which is once again the opposite of what is found without the threat of demand-side substitution.