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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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In considering the structural change in the final good market, this paper re-examines the welfare implications of input price discrimination in vertically-related markets. We have found that discriminatory pricing may be superior to uniform pricing in terms of welfare if there are new downstream firms to be served under discriminatory pricing. However, this result cannot always be true. If the marginal cost difference becomes large but non-drastic, the new entrants are too inefficient, allowing price discrimination may lower social welfare. Therefore, the social welfare under monopoly may be higher than that under duopoly. It implies that the social welfare of price discrimination does not only depend on the structure of the downstream market, the marginal cost difference also plays an important role. Moreover, the fixed costs of the downstream firms should be considered as well.

 

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