The welfare effects of input price discrimination revisited

Abstract

This paper revisits the welfare effects of input price discrimination in the canonical model in which an upstream monopolist, under linear pricing, sells an intermediate good to downstream Cournot competitors with different marginal costs. By leveling the downstream players, input price discrimination may have a positive output effect, with the magnitude depending on the convexity of final market demand and its rate of change. When demand is linear, concave, or convex with limited and nonincreasing convexity, welfare is reduced compared with uniform pricing. Instead, when there is sufficient and nondecreasing convexity—often observed in constant elasticity demand—price discrimination increases total welfare.