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Wholesale Market Power and the Limited Profitability of Retail Zone Pricing

Author

Listed:
  • Jeff Thurk

    (University of Notre Dame)

  • Eugenio Miravete

    (University of Texas at Austin)

  • Katja Seim

    (University of Pennsylvania)

Abstract

We present a general analysis of third-degree price discrimination in vertical markets. We show that downstream third-degree price discrimination impacts upstream demand, thereby leading the upstream firm to modify its pricing decision which in turn impacts downstream costs. We show this response not only reduces the profitability of downstream third-degree price discrimination, it also means the relative demand curvature condition of Aguirre, Cowan, & Vickers (AER 2010) is no longer sufficient for price discrimination to increase welfare. Numerical experiments indicate the strategic behavior of upstream firms can have a large adverse effect on downstream profits and consumer welfare.

Suggested Citation

  • Jeff Thurk & Eugenio Miravete & Katja Seim, 2019. "Wholesale Market Power and the Limited Profitability of Retail Zone Pricing," 2019 Meeting Papers 1146, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1146
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