Input price discrimination and vertical integration

Working paper

An upstream monopolist owns a downstream firm that competes with independent retailers and maximizes its own profit. The effects of allowing the integrated firm to discriminate in favor of its retail division, rather than requiring a uniform wholesale price, are assessed. When the retailers choose outputs discrimination raises social welfare, aggregate profits, and consumer surplus because it alleviates the double-margins problem. When there is up stream competition discrimination may operate via refusal to supply (if this is credible). This reduces welfare compared to uniform pricing. The main model is extended to price-setting retailers where the retailer owned by the upstream firm is less efficient than the rival retailer. Again wholesale price discrimination is good for consumers and social welfare. The elimination of double marginalization is the key.

Authors: Cowan, S

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Place of publication: Oxford, UK
• Publication date: 2026-04-08
• Paper number: 1114
• Language: English
• Keywords: price discrimination; double marginalization; vertical integration