Input price discrimination and strategic inventory

Abstract

We consider a two-period model with strategic inventory and explore the welfare implications of banning input price discrimination. We find that inventory incentive is stronger under input price discrimination. Under uniform pricing, an increase in an inventory of a firm equally lowers the rival's wholesale price. It expands the rival's production, suppresses the firm's output, and weakens the incentive. We also find that the weak incentive leads to higher quantity-weighted average wholesale and retail prices. Therefore, allowing input price discrimination alleviates double marginalization and leads to higher consumer surplus and social welfare.