Input Market Price Discrimination and the Choice of Technology

• Published in: The American economic review 1990-12, Vol.80 (5), p.1246-1253
• Main Author: DeGraba, Patrick
• Format: Article
• Language: English
• Subjects: Capital costs; Choice of technology; Demand curves; Economic models; Economic theory; Economics; Effects; Final goods; Fixed costs; Game theory; Input output analysis; Marginal costs; Market; Market equilibrium; Market prices; Monopolies; Nash equilibrium; Pliers; Price discrimination; Price fixing; Prices; Pricing policies; Protectionism; Welfare
• ISSN: 0002-8282; 1944-7981

A simple model is developed to examine how price discrimination in a market for a variable input affects downstream producers' long-run choice of a production technology. In the model, a monopoly supplier of a variable input sells to 2 downstream producers who use the input in the production of a final good. These producers must first choose a level of marginal cost and then compete as Cournot duopolists who face a linear demand curve in the final goods market. The market equilibrium in which the supplier is allowed to price-discriminate is compared to the equilibrium in which the supplier must charge a uniform price to both downstream firms. Two results are obtained: 1. If the downstream producers have different constant marginal costs of production, the price-discriminating input supplier will charge the low-cost producer a higher price than the high-cost producer is charged, partially offsetting the cost advantage. 2. The downstream producers will choose a technology with a higher marginal cost when the supplier price-discriminates than they will if the supplier charges a uniform price.