Input Price Discrimination by Resale Market

Abstract

This paper analyzes supply tariffs that discriminate between resale in different markets. In a setting with competing retailers that operate in multiple (independent or interdependent) markets, we show that, all else equal, the supplier wants to discriminate against resale in the market with the higher aggregate cross-seller diversion ratio. We nd that discrimination can improve allocative e¢ ciency and present sufficient conditions, involving the pass-through rates and the inverse market demand curvatures in the di¤erent markets, under which discrimination has positive effects on output and welfare. Our insights are relevant for the policy treatment of vertical restraints on online sales.