Price Discrimination in Input Markets: Quantity Discounts and Private Information

Abstract

We consider a monopolistic supplier’s optimal choice of wholesale tariffs when downstream firms are privately informed about their retail costs. The existing literature typically ignores the possibility of downstream firms having private information. Under discriminatory pricing, downstream firms that differ in their ex ante distribution of retail costs are offered different tariffs. Under uniform pricing, the same wholesale tariff is offered to all downstream firms. In contrast to the extant literature on third-degree price discrimination with nonlinear wholesale tariffs, we find that banning discriminatory wholesale contracts—the usual legal practice in the EU and US—often is beneficial for consumers and social welfare. This result is shown to be robust even when the upstream supplier faces competition in the form of fringe supply.

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