Input Price Discrimination, Horizontal Merger and Social Welfare in a Vertical Quality-Differentiated Market

Abstract

Abstract We consider vertical quality-differentiated products in a two-tier market in which there are two incumbent firms that produce the high-and low-quality products, and one potential new firm produces low-quality product. The upstream firm may charge uniform input price (UIP) or input discriminatory price (IDP) to the downstream firms. We show that once high-quality firm merged with the other low-quality firm, the merged firm will only produce high-quality product. What’s more, after firm 1 merged with firm 2, upstream firm adopts IPD strategy enhances social welfare if the difference of effective demand between high-quality product and low-quality product is sufficiently large. JEL Classifications: L24; L13; D43; D12