Faculty of Economics and Business Administration Publications Database

Market Power, Price Discrimination, and Allocative Efficiency in intermediate-goods markets

Shaffer, Greg
Volume: 40
Number: 4
Pages: 658 - 672
Month: Winter
ISSN-Print: 1756-2171
Link External Source: Online Version
Year: 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.