Multilateral Vertical Contracting with an Alternative Supply: The Welfare Effects of a Ban on Price Discrimination

Rey and Tirole [Handbook of Industrial Organization. Amsterdam: Elsevier (2005)] considered a model in which a monopolist sells to downstream firms using nonlinear contracts. They showed that banning price discrimination fully restores the supplier's ability to leverage its monopoly power by en...

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Bibliographic Details
Published in:Review of industrial organization 2006-02, Vol.28 (1), p.63-80
Main Author: CAPRICE, STÉPHANE
Format: Article
Language:English
Subjects:
Bans
Bargaining
Competition
Competitiveness
Contracts
Economic models
Fees
Fringe
Industry
Marginal costs
Monopolies
Oligopoly
Organization theory
Price cuts
Price discrimination
Prices
Pricing policies
Product differentiation
Retail industries
Retail stores
Social welfare
Studies
Suppliers
Supply
Vertical integration
Welfare
Wholesale prices
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Summary:Rey and Tirole [Handbook of Industrial Organization. Amsterdam: Elsevier (2005)] considered a model in which a monopolist sells to downstream firms using nonlinear contracts. They showed that banning price discrimination fully restores the supplier's ability to leverage its monopoly power by enabling it to commit not to offer side discounts. I show that the situation changes when the supplier competes against a fringe of less efficient rivals rather than being a monopolist. Then banning price discrimination may cause per-unit prices to fall and welfare to increase. The dominant supplier can take advantage of a strategic bargaining effect: reducing the per-unit price makes the outside option of buying from the fringe less profitable, allowing the dominant supplier to extract more bargaining surplus through the fixed fee.
ISSN:0889-938X
1573-7160
DOI:10.1007/s11151-006-0008-6