Entry Facilitating Price Discrimination

Posted by Social Science Research Network

Entry Facilitating Price Discrimination – Markus Dertwinkel-Kalt (Heinrich Heine Universität Dusseldorf – Duesseldorf Institute for Competition Economics), Justus Haucap (Heinrich Heine Universität Dusseldorf – Department of Economics ; German Institute for Economic Research) and Christian Wey (University of Düsseldorf – Düsseldorf Institute for Competition Economics)

ABSTRACT: We analyze the entry-facilitating effects of input market price discrimination. An upstream firm has an incentive to create competition downstream which is realized by selling at an advantageous price to an (inefficient) entrant when discrimination is possible. We augment the entry issue into existing frameworks of Katz (1987), DeGraba (1990), and Yoshida (2000) which allows us to show that price discrimination in intermediary goods markets tends to have positive effects on allocative, dynamic and productive efficiency, respectively. In contrast, a discrimination ban tends to deter entry of relatively inefficient firms, thereby strengthening downstream market concentration.