Nonexclusionary input prices

Abstract

This article models a vertically integrated provider that is a monopoly supplier of an input that is essential for downstream production. An input price that is ‘too high’ can lead to inefficient foreclosure and one that is ‘too low’ creates incentives for nonprice discrimination. The range of nonexclusionary input prices is circumscribed by the input prices generated on the basis of upper-bound and lower-bound displacement ratios. The admissible range of the ratio of downstream to upstream price–cost margins is increasing in the degree of product differentiation and reduces to a single ratio in the limit as the products become perfectly homogeneous.

Keywords:

• input prices
• vertical integration
• foreclosure
• sabotage

JEL Classification:

• L51
• L96

Notes

¹ The input price that results when this last relation holds with equality is a form of the efficient component pricing rule or ECPR.

² Weisman (2013) examines a similar problem in which the VIP is the leader and the rival is the follower.

³ Lemmas 1 and 2 along with Equations 5, 6 and A7 imply that and