Timing of investments and third degree price discrimination in intermediate good markets

Economics Letters, 2013, vol. 121, issue 2, 316-320

Abstract: This paper studies the discriminatory pricing of an intermediate good and compares two models with a different timing of investments undertaken by the downstream firms, before or after the upstream monopolist sets the input prices. When the more efficient downstream firm is charged a higher price than the less efficient firm in the first model, in the second model when investments are made after input prices are set, it may be charged a lower price due to the additional indirect effect of input prices on derived demands (via the change of investment incentives). It is illustrated that, with linear market demand and quadratic investment cost, whether a lower or higher price is charged to the more efficient firm depends on the ratio of the linear and quadratic coefficients in the cost function.

Keywords: Price discrimination; Intermediate good; Investment; Timing (search for similar items in EconPapers)
JEL-codes: D4 L1 O3 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:121:y:2013:i:2:p:316-320

DOI: 10.1016/j.econlet.2013.08.032

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