Input price discrimination and incentives for raising rivals’ costs

This research analyzes the effects of input price discrimination when downstream firms have incentives for raising rivals’ costs. In the model, an input monopolist chooses unit prices for the input sold to two downstream firms via either discriminatory pricing or uniform pricing. Results show that the more efficient firm has stronger incentives than the less efficient firm to undertake cost-raising activities. Relative to uniform pricing, the more efficient firm causes a smaller amount of cost increase to the rival firm under discriminatory pricing. In contrast, discriminatory pricing may induce the less efficient firm to make a greater amount of cost increase. We find that input price discrimination could benefit both consumers and downstream firms and hence is socially desirable.