Wholesale Price Discrimination: Innovation Incentives and Upstream Competition

Abstract

In intermediate goods markets where there are alternative supply sources, wholesale price discrimination may enhance retailersíinnovation incentives. We consider a vertical chain where a dominant Örm and a competitive fringe supply imperfect substitutes to duopolistic retailers which carry both varieties. We show that a ban on price discrimination by the dominant supplier makes uniform pricing credible and reduces retailersíincentives to decrease the cost of acquiring the competitively supplied variety, leading to higher upstream proÖts and lower downstream welfare. Our analysis complements existing results by identifying a novel channel through which wholesale price discrimination can improve dynamic e¢ ciency of the market.