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Welfare Implications of Third-degree Price Discrimination in Input Markets

Chin-Sheng Chen

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Hong Hwang

Working paper

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This paper investigates the welfare effects of price discrimination in input markets with a model of competition between chain stores and local firms. In a benchmark where the chain store has integrated backward, we have found that, with a general cost structure in the final good industry, the input monopolist if adopts discriminatory pricing may charge a more efficient local firm a lower input price. Moreover, without changing the total output of the final good, the price discrimination resulting in higher consumption benefits of final good can enhance social welfare even if production efficiency is getting worse off at the same time. This consequence is also valid when the chain store is not integrated.