Does Product Quality Matter for Welfare Implications of Input Price Discrimination?

This paper considers that upstream monopoly firm sets input price discrimination (IPD) or uniform input pricing (UIP) in the quality competition market. The marginal cost is related to product quality. We find: When overall quality is low, the upstream firm will give a lower intermediate-products price to the low-quality firm under IPD compared with UIP; low-quality firm’s outputs and profit under IPD are higher and more consumers purchase low-quality products, IPD reduces consumer surplus. When overall quality is high, it’s the opposite, and IPD increases consumer surplus. Even though all parties’ interests are conflicting, IPD may improve social welfare