Strategic input price discrimination with horizontal shareholding

Abstract

Price discrimination has substantial social and policy implications and has received attention in the literature. However, prior research on input price discrimination has primarily been limited to single-input situations. We explore the strategic desirability of uniform pricing and contribute to the growing literature on perfectly complementary inputs in vertical markets. We consider a vertically related market in which two symmetric upstream firms provide perfectly complementary inputs for two downstream manufacturers, one of which has a non-controlling interest in its rival. Each upstream firm can choose between two pricing regimes: discriminatory or uniform. This study shows that although uniform pricing limits the firm’s flexibility, one upstream firm voluntarily chooses uniform pricing, and the other chooses discriminatory pricing in equilibrium. Furthermore, in the mixed-strategic equilibrium for the pricing regimes, we find that downstream horizontal shareholding makes upstream firms likely to choose uniform pricing, which is undesirable for consumers and society. We extend the above analysis to the following directions: endogenous horizontal shareholding and two-part tariffs.