סמינר באסטרטגיה בשיתוף עם בית ספר לכלכלה

Abstract:

In many vertical industries, an essential input provided by an upstream monopolist can be transformed to substitutable final goods of different qualities, depending on how much input is used in the transformation process. Examples include the processing of raw materials, retail products compared to various forms of renting and sharing, and heterogeneous utilization schemes of essential facilities like harbors and airport slots. This article is the first to show that entry of a more input-efficient, but lower quality "alternative" 

downstream firm (A), compared to an incumbent downstream producer (P), might be detrimental to social welfare. In particular, if A is extremely efficient, a monopolist supplier maximizes profits by charging an excessive price, driving P out of the market and reducing social welfare. This is optimal if compensating for A's low input requirement by choosing an excessive price dominates reducing double-marginalization externalities by allowing for downstream competition. However, despite A's low input requirement, the supplier's profit increases for all but the most efficient alternative technologies.

Enabling the supplier to engage in third degree price discrimination may increase social welfare.