Spatial Pricing in Uncontested Procurement Markets: Regulatory Implications

Abstract This study derives a general characterization of the misalignment between socially and privately optimal spatial pricing in an uncontested procurement market. In doing so it clarifies the link between firm-gate price markdown (pricing the input below its marginal value product at the firm’s location) and spatial price discrimination (varying markdown by distance). We subsequently examine the implications of our results for regulatory prescriptions. Our analysis reveals that, in the absence of regulation, increased firm-gate price markdown is necessarily accompanied by intensified spatial price discrimination, and that discrimination is always conducted against nearby producers. We find that if regulation targets price markdown at the firm gate, then spatial price discrimination is also inhibited resulting in welfare gains. In contrast, directly targeting spatial price discrimination (as generally prescribed by enacted and proposed legislation) cannot attain a first best, and may in fact result in efficiency losses relative to the unregulated equilibrium.