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Price Discrimination and Production Technology in Vertically Related Markets

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Kuo-Feng Kao and Hong Hwang

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Working Paper

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Kuo-Feng Kao (°ª°ê峯)

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In this paper, we examine the welfare effect of price discrimination in vertically-related markets with different production technology. It is found that when the source of price discrimination comes from the difference of production technology, allowing price discrimination may increase social welfare. If price discrimination is allowed, the upstream monopolist can fine tune the final outputs among the downstream markets. Price discrimination makes the distribution of the final goods more evenly, and aggregate outputs increases. As long as the production cost of the input is not too high, the benefits coming from price discrimination can outweigh the increase in total costs. That improves the social welfare.

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