The Incentive for Non-Price Discrimination by an Input Monopolist

This paper considers the incentive for non-price discrimination of amonopolist in an input market who also sells in an oligopoly downstreammarket through a subsidiary. Such a monopolist can raise the costs ofthe rivals to its subsidiary though discriminatory quality degradation.I find that the monopolist always, even when it is cost-disadvantaged,has the incentive to raise the costs of the rivals to its subsidiary ina discriminatory fashion, but does not have the incentive to raise coststo the whole downstream industry including its subsidiary. Moreover,increasing rivalsâ costs nullifies the effects of traditionalimputation floors, and prompts the creation of imputation floors thataccount for the artificial costs imposed on downstream rivals. Theresults of this paper raise concerns about the potentiallyanti-competitive effects of entry of local exchange carriers in longdistance service. The results may also suggest the imposition of certainunbundling and technical specification disclosure requirements tomonopolists in high technology industries