Price-Discrimination with Nonlinear Contracts in Input Markets

Most of the literature on price discrimination in input markets has focused on linear per-unit prices used by a monopolist supplier. Here, we provide a complete characterization of the equilibrium two-part tariffs, which can allow the monopolist supplier to obtain (at a minimum) the profit that an efficient downstream firm would earn. Depending on the characteristics of the industry, the supplier can find it profitable to monopolize the downstream market. Price discrimination with nonlinear contracts can nonetheless improve welfare as it can eliminate the double marginalization problem and remove an inefficient firm from the market.