We thank two anonymous referees and the editor, Jennifer Reinganum, for helpful comments.
Market power, price discrimination, and allocative efficiency in intermediate-goods markets
Article first published online: 12 OCT 2009
© 2009, RAND
The RAND Journal of Economics
Volume 40, Issue 4, pages 658–672, Winter 2009
How to Cite
Inderst, R. and Shaffer, G. (2009), Market power, price discrimination, and allocative efficiency in intermediate-goods markets. The RAND Journal of Economics, 40: 658–672. doi: 10.1111/j.1756-2171.2009.00083.x
- Issue published online: 12 OCT 2009
- Article first published online: 12 OCT 2009
We consider a monopolistic supplier's optimal choice of two-part tariff contracts when downstream firms are asymmetric. We find that the optimal discriminatory contracts amplify differences in downstream firms' competitiveness. Firms that are larger—either because they are more efficient or because they sell a superior product—obtain a lower wholesale price than their rivals. This increases allocative efficiency by favoring the more productive firms. In contrast, we show that a ban on price discrimination reduces allocative efficiency and can lead to higher wholesale prices for all firms. As a result, consumer surplus, industry profits, and welfare are lower.