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Price Discrimination and Production Technology in Vertically Related Markets

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Hong Hwang and Kuo-Feng Kao

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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 when the downstream firms have different production technology. It is found that allowing price discrimination may increase social welfare if the source of price discrimination comes from the difference of production technology. First of all, when the downstream markets are independent and the technology difference is large enough, price discrimination increases the aggregate outputs and makes the distribution of the final outputs between markets more evenly. The social welfare improves. Second, when the downstream markets are independent, price discrimination improves social welfare only if the aggregate outputs increase. Finally, whether the downstream markets are independent or integrated, the necessary condition of allowing price discrimination improves social welfare is that the decrease of input price in inefficient market is larger than the increase of input price in efficient market.

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