Input Price Discrimination, Demand Forms, and Welfare

Abstract

In this paper, we analyse the effects of input price discrimination by an upstream monopolist selling to firms with various degrees of efficiency. When downstream markets are independent, we first study whether the upstream monopolist has an incentive to reduce or to increase the relative cost difference amongst downstream firms. Then, we examine the impact of input price discrimination on output and welfare. A key determinant of the effects of input price discrimination on prices, output, and welfare is the sum of demand curvature and pass-through elasticity. We apply our findings to the set of demand forms with constant pass-through rates, as well as other demand forms. We also discuss the cases of demand asymmetries across markets and price competition downstream.