Wholesale price discrimination: Innovation incentives and upstream competition.

A paper by Uğur Akgün (CRA) and Ioana Chioveanu (Brunel University) on the effects of wholesale price discrimination on innovation incentives has been published in Journal of Economics & Management Strategy.

In intermediate good markets where there are alternative supply sources, wholesale price discrimination may enhance innovation incentives down-stream. The authors consider a vertical chain where a dominant firm and a competitive fringe supply imperfect substitutes to duopoly retailers which carry both varieties. They show that a ban on price discrimination by the dominant supplier makes uniform pricing credible and reduces retailers ’incentives to decrease the cost of acquiring the competitively supplied variety, leading to higher upstream profits and lower downstream welfare. The analysis complements existing results by identifying a novel channel through which wholesale price discrimination can improve dynamic market efficiency.

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