Input Price Discrimination: The Role of Retail Effort Spillovers

ABSTRACT

We investigate input price discrimination under secret contracting between a manufacturer and competing retailers, whose investment activities exhibit retail effort spillovers. We show that the economic effects of input price discrimination vary with the sign and magnitude of retail effort spillovers according to the contractual structure, namely, linear or two‐part tariffs. Retail effort spillovers and product differentiation affect the pass‐through of input price to retail quantity, which is defined under each contractual structure. Our analysis provides novel insights into the role of retail effort spillovers and into the evaluation of quantity pass‐through in the antitrust scrutiny of input price discrimination.