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Input Price Discrimination, Market Structure and Social Welfare

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Kuo-Feng Kao and Cheng-Hau Peng

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Working Paper

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Cheng-Hau Peng

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Considering the structural change of the final good market, this paper re-examines the welfare implication of input price discrimination in the vertically related markets. We assume that in exercising its monopoly power, the upstream monopolist can select either a uniform or a discriminatory pricing. We have found that, in the short run, discriminatory pricing is superior (inferior) to uniform pricing in terms of welfare if the marginal cost differentiation between the two downstream firms is moderate (small). In the long run, the welfare ranking of the two pricing regimes is contingent on the dynamic efficiencies of the two downstream firms. The welfare is the same under both pricing schemes as the marginal cost differentiation is large or the dynamic efficiency is high.

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