Spatial price discrimination with a ‘must-have’ component

An upstream firm provides a valuable component with either an exclusive or nonexclusive contract to two downstream firms on a horizontal market. The downstream firms engage in either uniform pricing or spatial price discrimination. The component provider is more likely to sign an exclusive contract under discriminatory pricing. Discriminatory pricing generates higher welfare when both pricing methods result in exclusive contracts and generates the same welfare when both methods result in nonexclusive contracts. Importantly it generates lower welfare when discriminatory pricing results in exclusive contracts and uniform pricing results in nonexclusive contracts. These results prove robust to a variety of model variations.