optimal interest rate rules asset prices and credit frictions we study optimal taylor type interest rate rules in an economy with credit market imperfections our analysis builds on the agency cost framework of carlstrom and fuerst 1997 agency costs net worth and business fluctuations a computable general equilibrium analysis american economic review 87 893 910 which we extend in two directions first we embed monopolistic competition and sticky prices second we modify the stochastic structure of the model in order to generate a countercyclical premium on external finance this is achieved by linking the mean distribution of investment opportunities faced by entrepreneurs to aggregate total factor productivity we model monetary policy in terms of simple welfare maximizing interest rate rules we find that monetary policy should respond to increases in asset prices by lowering interest rates however when monetary policy responds strongly to inflation the marginal welfare gain of responding to asset prices vanishes within the class of linear interest rate rules that we analyze a strong anti inflationary stance always attains the highest level of welfare

on the sources of aggregate fluctuations in emerging economies recent research on macroeconomic fluctuations in emerging economies has advocated introducing a stochastic productivity trend or allowing for interest rate shocks and financial frictions we estimate a model that encompasses these two approaches shedding light on their relative merits and on how financial frictions affect the transmission of shocks the model accounts for aggregate fluctuations by assigning a dominant role to financial frictions in amplifying conventional temporary productivity shocks whereas trend shocks play a minor role a link between spreads and expected future productivity emerges as essential for a reasonable approximation to the data

price discrimination and investment incentives abstract we examine a model of a monopolist selling to two segments of consumers with different preferences for quality we show that if the firm is unable to price discriminate between the segments then there is less investment in quality we find that both consumer segments and society overall may suffer if the firm is unable to price discriminate we extend the model to duopoly competition and find that our results still hold

the financial accelerator and monetary policy rules abstract comparing bernanke et al s 1999 financial accelerator model to a comparable model without an operational financial accelerator mechanism we find that financial acceleration is reduced when monetary policy reacts to the output gap and when firm specific volatility rises

the real consequences of financial stress abstract we introduce a dynamic banking macro model which abstains from conventional mean reversion assumptions and in which similar to brunnermeier and sannikov 2010 adverse asset price movements and their impact on risk premia and credit spreads can induce instabilities in the banking sector to assess such phenomena empirically we employ a multi regime vector autoregression mrvar approach rather than conventional linear vector autoregressions we conduct bivariate empirical analyses using country specific financial stress indices and industrial production for the u s the uk and the four large euro area countries our mrvar based impulse response studies demonstrate that compared to a linear specification response profiles are dependent on the current state of the economy as well as the sign and size of shocks previous multi regime based studies focusing solely on the regime dependence of responses conclude that during a high stress period stress increasing shocks have more dramatic consequences for economic activity than during low stress conducting size dependent response analysis we find that this holds only for small shocks and reverses when shocks become sufficiently large to induce immediate regime switches our findings also suggest that in states of high financial stress large negative shocks to financial stress have sizeable positive effects on real activity and support the idea of unconventional monetary policy measures in cases of extreme financial stress

optimal monetary policy rules financial amplification and uncertain business cycles abstract this paper studies optimal monetary policy in the presence of uncertainty time variation in cross sectional dispersion of firms productive performance using a model with financial market imperfections the results suggest that i optimal policy is to dampen the strength of financial amplification by responding to uncertainty at the expense of creating mild degree of fluctuations in inflation ii higher uncertainty makes the welfare maximizing planner more willing to relax financial constraints iii credit spreads are a good proxy for uncertainty hence a non negligible response to credit spreads together with a strong anti inflationary policy stance achieves the highest aggregate welfare possible

an expectations driven interpretation of the great recession abstract the boom years preceding the great recession were a time of rapid innovation in the financial industry we explore the idea that both the boom and eventual bust emerged from overoptimistic expectations of efficiency gains in the financial sector we treat the bankruptcy costs facing intermediaries in a costly state verification problem as a stochastic process and model the boom bust in terms of an unfulfilled news shock where the expected fall in costs are eventually not realized in response to a change in expectations only the model generates a boom bust cycle in aggregate activity asset prices and leverage and a countercyclical credit spread

the welfare effects of third degree price discrimination in the author examines third degree price discrimination by an upstream monopolist in an intermediate good market discrimination is motivated by the fact that downstream firms differ in their abilities to integrate backward into supply of the input the author shows that under reasonable specifications of equilibrium price discrimination leads to all buyers facing higher input prices in other cases discrimination raises some prices and lowers others the author derives conditions under which discrimination lowers welfare by reducing total output and shows that in some markets discrimination will raise welfare by preventing socially inefficient backward integration copyright 1987 by american economic association

unequal treatment of identical agents in cournot equilibrium oligopoly models where prior actions by firms affect subsequent marginal costs have been useful in illuminating policy debates in areas such as antitrust regulation environmental protection and international competition we discuss properties of such models when a cournot equilibrium occurs at the second stage aggregate production costs strictly decline with no change in gross revenue or gross consumer surplus if the prior actions strictly increase the variance of marginal costs without changing the marginal cost sum therefore unless the cost of inducing second stage asymmetry more than offsets this reduction in production costs the private and social optima are asymmetric

integrating behavioral choice into epidemiological models of aids increased hiv risk creates incentives for people with low sexual activity to reduce their activity but may make high activity people fatalistic leading them to reduce their activity only slightly or actually increase it if high activity people reduce their activity by a smaller proportion than low activity people the composition of the pool of available partners will worsen creating positive feedbacks and possibly multiple steady states early public health efforts may allow societies to reach more favorable steady states excerpt

international business cycles and the relative price of investment goods is the relative price of investment goods a good proxy for investment specific technology we model this relative price in a flexible price international economy with two fundamental shocks namely the total factor productivity tfp shock and the investment specific technology ist shock we show that the one to one correspondence between the ist shock and the relative price of investment goods breaks down in an international economy because of the short run correlation between the terms of trade and the relative price of investment goods the data congruent negative correlation between the investment rate and the relative price of investment goods thus does not necessarily reflect decline in investment frictions rise in ist as suggested by many studies a calibration experiment with the us data demonstrates that such an inverse relation between rate of investment and the relative price of investment goods basically reflects the positive effect of tfp on the terms of trade for a broad range of economies where the home bias in consumption exceeds investment and there is a sizable adjustment cost of investment est ce que le prix relatifs des biens d investissement est un bon indicateur du changement technique fonde sur l investissement on construit un modele du prix relatif des biens d investissement dans une economie internationale a prix flexibles soumis a deux chocs fondamentaux la productivite totale des facteurs tfp et le changement technique fonde sur l investissement ist on montre que la correspondance bijective entre le choc ist et les prix relatifs des biens d investissement disparait dans une economie internationale a cause de la correlation a court terme entre les termes d echange et les prix relatifs des biens d investissement la correlation negative entre le taux d investissement et les prix relatifs des biens d investissement qu on retrouve dans les donnees ne reflete donc pas necessairement un declin dans les frictions d investissement accroissement de ist comme certaines etudes le suggerent un effort de calibration a l aide de donnees americaines montre qu une telle relation entre le taux d investissement et le prix relatif des biens d investissement reflete l effet positif de la tfp sur les termes d echange pour un grand eventail d economies ou la preference pour les produits domestiques est plus grande dans les biens de consommation que dans les biens d investissement et qu il y a donc un ajustement considerable dans le cout de l investissement

discriminatory nonlinear pricing fixed costs and welfare in intermediate goods markets abstract we investigate the welfare effects of third degree price discrimination in input markets when nonlinear wholesale tariffs are feasible after accepting their respective wholesale contracts two downstream firms have to pay a fixed cost in order to become active in the downstream market if the downstream firm with lower marginal cost has significantly higher fixed cost uniform pricing leads to lower marginal wholesale prices for all downstream firms and thus higher quantities of the final product being produced this in turn implies that banning price discrimination improves welfare and consumer surplus if the downstream firm with lower marginal cost has only weakly higher or even lower fixed cost banning price discrimination deteriorates welfare and consumer surplus

a banking explanation of the us velocity of money 1919 2004 the paper shows that us gdp velocity of m1 money has exhibited long cycles around a 1 25 per year upward trend during the 1919 2004 period it explains the velocity cycles through shocks constructed from a dsge model and annual time series data ingram et al 1994 model velocity is stable along the balanced growth path which features endogenous growth and decentralized banking hat produces exchange credit positive shocks to credit productivity and money supply increase velocity as money demand falls while positive goods productivity shock raises temporary output and velocity the paper explains such velocity volatility at both business cycle and long run frequencies with filtered velocity turning negative starting during the 1930s and the 1987 crashes and again around 2003 results suggest that the money and credit shocks appear to be more important for velocity during less stable times and the goods productivity shock more important during stable times

global banks financial shocks and international business cycles evidence from an estimated model this paper estimates a two country model with a global bank using us and euro area ea data and bayesian methods the estimated model matches key us and ea business cycle statistics empirically a model version with a bank capital requirement outperforms a structure without such a constraint a loan loss originating in one country triggers a global output reduction banking shocks matter more for ea macro variables than for us real activity during the great recession 2007 09 banking shocks accounted for about 20 of the fall in us and ea gdp and for more than half of the fall in ea investment and employment

price discrimination and social welfare studies the effect of price discrimination on social welfare using methods from duality theory features of the reservation model presented quasi linear utility and consumers surplus upper and lower bounds on welfare change bounds on welfare change with optimal price discrimination from ebsco

what does a financial shock do first international evidence in this paper we attempt to evaluate the quantitative impact of financial shocks on key indicators of real activity and financial conditions we focus on financial shocks as they have received wide attention in the recent literature and in the policy debate after the global financial crisis we estimate a panel var for 21 advanced economies based on quarterly data between 1985 and 2011 where financial shocks are identified through sign restrictions we find robust evidence that financial shocks can be separately identified from other shock types and that they exert a significant influence on key macroeconomic variables such as gdp and particularly investment but it is unclear whether these shocks are demand or supply shocks from the standpoint of their macroeconomic impact the financial development and structure of a given country is found not to matter much for the intensity of the propagation of financial shocks moreover we generally find that these shocks play a role not only in crisis times but also in normal conditions finally we discuss the implications of our findings for monetary policy fabio fornari and livio stracca

risk premium shocks and the zero bound on nominal interest rates there appears to be a disconnect between the importance of the zero bound on nominal interest rates in the real world and predictions from quantitative dsge models recent economic events have reinforced the relevance of the zero bound for monetary policy whereas quantitative models suggest that the zero bound does not constrain optimal monetary policy

bank leverage cycles and the external finance premium by combining the approaches of gertler and karadi 2011 and bernanke et al 1999 i develop a dsge model with leverage constraints both in the banking and in the non financial firm sector i calibrate this full model to us data in a world with only a monetary policy and a productivity shock the full model matches the relative volatility of the external finance premium while a bgg model generates too low volatility the full model also matches the procyclicality of bank leverage unlike the gk model for a reasonably calibrated combination shocks to the net worth of banks and non financial firms the model reproduces a substantial share of the contraction increase of investment the external finance premium observed during the great recession

economies of feedlot scale biosecurity investment and endemic livestock disease infectious livestock disease creates externalities for proximate animal production enterprises the distribution of production scale within a region should influence and be influenced by these disease externalities taking the distribution of the unit costs of stocking an animal as primitive we show that an increase in the variance of these unit costs reduces consumer surplus the effect on producer surplus total surplus and animal concentration across feedlots depends on the demand elasticity a subsidy to smaller herds can reduce social welfare and immiserize the farm sector by increasing the extent of disease while nash behavior involves excessive stocking disease effects can be such that aggregate output declines relative to first best disease externalities can induce more adoption of a cost reducing technology by larger herds so that animals become more concentrated across herds for strategic reasons excess overall adoption of the innovation may occur larger herds are also more likely to adopt biosecurity innovations explaining why larger herds may be less diseased in equilibrium

explaining business cycles a multiple shock approach abstract aiyagari 1992 and prescott 1986 1991 claim that a large fraction of the variance of united states quarterly detrended real gnp is attributable to an unobservable shock to total factor productivity this paper argues that the importance of a productivity shock in explaining the variance of output is fundamentally indeterminate any model that is in accord with the several time series that make up united states macroeconomic data must feature multiple shocks that are correlated at all leads and lags sorting out the separate effects of these various shocks on a single variable such as real gnp is impossible we illustrate this argument using a multiple shock version of the king plosser rebelo 1988 benchmark real business cycle model

fleshing out the monetary transmission mechanism output composition and the role of financial frictions financial frictions affect the way in which different macroeconomic series respond to a monetary policy shock we embed the financial accelerator of bernanke gertler and gilchrist 1999 into a medium scale dsge model and evaluate the relative importance of financial frictions in explaining monetary transmission specifically we apply minimum distance estimation based on impulse responses for the volcker greenspan period apart from providing estimates for structural parameters our procedure lends itself for specification tests that can be used to assess the relative fit of various restricted models financial frictions turn out to be of lesser importance for the descriptive success of our model

international risk sharing and financial shocks abstract a canonical two country real business cycle model with complete international asset markets fails to replicate the correlation between relative consumptions and real exchange rates i e the consumption real exchange rate anomaly or backus smith puzzle i show that when preferences are non separable between consumption and leisure the same two country model augmented by domestic financial frictions and shocks can account for this correlation positive financial shocks create important fluctuations in the labor wedge inducing firms to demand more labor these procyclical movements in hours worked significantly affect the marginal utility of consumption and help to explain the correlation between relative consumptions and real exchange rates

search in the product market and the real business cycle empirical evidence suggests that most firms operate in imperfectly competitivemarkets we develop a search matching model between wholesalers and retailers firms face search costs and form long term relationships price bargain results in both wholesaler and retailer markups depending on firms relative bargaining power we simulate the model to explore the role of product market search frictions in business cycles we show that the way search costs are modelled is crucial to provide a realistic picture of firms business environment and improve the cyclical properties of an otherwise standard real business cycle model

price discrimination and sequential contracting in monopolistic input markets abstract this paper examines the welfare implication of banning price discrimination in the intermediate goods market in which a monopolistic supplier contracts with asymmetric downstream retailers we demonstrate that the supplier has a strong incentive to manipulate the interdependent demand structure through sequential contracting whether price discrimination is banned or not and allowing price discrimination improves social welfare and consumer surplus when sequential contracting is implemented by the supplier

money velocity in an endogenous growth business cycle with credit shocks the explanation of velocity has been based in substitution and income effects since keynes s 1923 interest rate explanation and friedman s 1956 application of the permanent income hypothesis to money demand modern real business cycle theory relies on a goods productivity shocks to mimic the data s procyclic velocity feature as in friedman s explanation while finding money shocks unimportant and not integrating financial innovation explanations this paper sets the model within endogenous growth and adds credit shocks it models velocity more closely with significant roles for money shocks and credit shocks along with the goods productivity shocks endogenous growth is key to the construction of the money and credit shocks since they have similar effects on velocity through substitution effects from changes in the nominal interest rate and in the cost of financial intermediation but opposite effects upon growth through permanent income effects that are absent with exogenous growth

can world real interest rates explain business cycles in a small open economy abstract while the world real interest rate is potentially an important mechanism for transmitting international shocks to small open economies much of the recent quantitative research that studies this mechanism concludes that it has little effect on output investment and net exports we re examine the importance of world real interest rate shocks using an approach that reverses the standard real business cycle methodology we begin with a small open economy business cycle model but rather than specifying the stochastic processes for the shocks and then solving and simulating the model to evaluate how well these shocks explain business cycles we use the model to back out the shocks that are consistent with the model s observable endogenous variables then we use variance decompositions to examine the importance of each shock we apply this methodology to canada and find that world real interest rate shocks can play an important role in explaining the cyclical variation in a small open economy in particular they can explain up to one third of the fluctuations in output and more than half of the fluctuations in net exports and net foreign assets

behavioral incentives equilibrium endemic disease and health management policy for farmed animals the article develops a dynamic capital valuation model in which farms can act with farm varying cost to increase the probability of avoiding an infectious endemic animal disease multiple endemic disease equilibria can exist and the one with the largest set of action takers is socially optimal costly capital markets are shown to be a factor in determining the extent of disease frictions such as dealing with a veterinary public health bureaucracy can enhance social welfare by encouraging precautionary biosecurity actions technical innovations can reduce social welfare and a disease indemnification scheme is also studied suggestions for empirical implementation are provided

a characterization for the negative welfare effects of cost reduction in cournot oligopoly abstract this paper characterizes the welfare effects of cost reductions in a cournot model with linear costs under linear demand a small reduction in a firm s marginal cost reduces welfare if and only if its market share is less than 1 2n 2 or equivalently its marginal cost exceeds a critical level determined by the market a large cost reduction by the firm increases welfare if and only if its magnitude is at least twice the difference between the current marginal cost and its critical value the paper also extends the results to non linear demand but the characterizations become less tractable

inflation human capital and tobin s q a pervasive empirical finding for the us economy is that inflation is negatively correlated with the normalized market price of capital tobin s q and growth a dynamic stochastic general equilibrium model of endogenous growth is developed to explain these stylized facts in this model human capital is the principal driver of self sustained growth long run comparative statics analysis suggests that inflation diverts scarce time resource to leisure which lowers human capital utilization this impacts growth adversely and modulates capital adjustment cost downward resulting in a decline in tobin s q for the short run a tobin effect of inflation on growth weakens the negative association between inflation and q

the external finance premium and the macroeconomy us post wwii evidence abstract the central variable of theories of financial frictions the external finance premium is unobservable this paper distils the external finance premium from a dynamic stochastic general equilibrium dsge model estimated on us macroeconomic data covering the period 1954 to 2004 within the dsge framework movements in the premium can be given an interpretation in terms of shocks driving business cycles a key result is that the estimate based solely on non financial macroeconomic data picks up over 70 of the dynamics of lower grade corporate bond spreads the paper also identifies a gain in fitting key macroeconomic aggregates by including financial frictions in the model and documents how shock transmission is affected

business cycle implications of mortgage spreads abstract how do aggregate quantities at the business cycle frequency respond to shocks to the spread between residential mortgage rates and government bonds using a structural var approach we find that mortgage spread shocks impact the real economy by both economically and statistically significant magnitudes a 100 basis point decline in the spread causes a peak increase in consumption residential investment and gdp by 1 6 percent 6 2 percent and 1 9 percent respectively presumably these effects are magnified when the policy rate is held fixed as was the case in the us during the recent implementation of unconventional monetary policy

infectious disease productivity and scale in open and closed animal production systems trade in feeder animals creates externalities when animal diseases can spread beyond the purchasing farm if growers choose between open and closed production systems then nash equilibrium likely involves excessive trading while first best equilibrium involves market wide adoption of either an open trade or closed farm system equilibrium may entail heterogeneous systems if so then the feeder trade should be restricted supply response to an increase in marginal costs may be positive within a farm infectious disease risk can create decreasing returns to scale when the technology is otherwise increasing returns contractual procurement and damage control technologies will likely increase scale in finishing

input price discrimination with downstream cournot competitors abstract this paper addresses third degree price discrimination in input markets i decompose the upstream monopolist s profit into two parts one that depends on average input prices and one that depends on their distribution this decomposition is useful in comparing the welfare properties of price discrimination against uniform pricing under reasonable assumptions input price discrimination negatively affects both consumer surplus and total welfare

do banking shocks matter for the u s economy abstract the quantitative significance of shocks to the financial intermediary fi has not received much attention up to now we estimate a dsge model with what we describe as chained credit contracts using bayesian technique in the model credit constrained fis intermediate funds from investors to credit constrained entrepreneurs through two types of credit contract we find that the shocks to the fis net worth play an important role in the investment dynamics accounting for 17 of its variations in particular in the great recession they are the key determinants of the investment declines accounting for 36 of the variations

financial shocks and the us business cycle employing the financial accelerator fa model of bernanke gertler and gilchrist 1999 enhanced to include a shock to the fa mechanism we construct and study shocks to the efficiency of the financial sector in post war us business cycles we find that financial shocks are very tightly linked with the onset of recessions more so than tfp or monetary shocks the financial shock invariably remains contractionary for sometime after recessions have ended the shock accounts for a large part of the variance of gdp and is strongly negatively correlated with the external finance premium second moments comparisons across variants of the model with and without a stochastic fa mechanism suggests the stochastic fa model helps us understand the data

a note on technology choice firm heterogeneity and welfare abstract in this note i extend the technology choice model of mills and smith int j ind org 14 1996 317 329 by analyzing an industry with more than two firms i show that heterogeneous firms can arise as in the duopoly case however the welfare implications are not robust in particular it is not necessarily the case that the market produces too much homogeneity when more than two firms are active the business stealing effect creates a bias towards overinvestment

third degree price discrimination in input markets output and welfare if price discrimination is realized the economy shifts from one equilibrium to another it clearly involves welfare effects the price discriminator clearly gains some consumers may also gain from the price cut but others may lose faced with higher prices etc traditionally the change in social welfare is known to be closely related to the change in total output in the case of third degree price discrimination it is well known that an increase in total output is a necessary condition for welfare improvement richard schmalensee 1981 proves this fact in a model in which the monopolist with constant marginal cost can perfectly separate markets further hal r varian 1985 extends this result to the case of interdependent markets permnitting increasing marginal cost of the monopolist and finally the assumption of nondecreasing marginal cost is eliminated by marius schwartz 1990 roughly speaking this proposition says that if there is a welfare gain from price discrimination there has to be some gain to offset the distortion involved on the other hand the vast majority of legal and other policy disputes over the price discrimination concern input markets not final good markets thus it seems important to investigate the situation in which a discriminating monopolist is not a final good supplier but an input supplier and the buyers of the input are downstream producers of a final good as is assumed in this paper if the downstream firms have different technologies their input demand functions will be different and thus the monopolist has an incentive to price discriminate in this scenario michael l katz 1987 and patrick degraba 1990 study the effect of inputmarket price discrimination and show that price discrimination always lowers welfare because it involves the distortion that a lower cost downstream firm is assigned a higher price unfortunately in their simple settings on the technology of downstream industry price discrimination can never change total output of the input or of the final good 1 thus we must say that welfare effect of input market price discrimination remains open to question if it has some effect on total output in particular we are curious as to whether we can obtain some close relationship between the changes in welfare and total output as we have obtained in the final good market settings with this motivation we will construct a model which involves change in total output of the final good in the next section the model and assumptions are provided in section ii after we extend the result of katz 1987 and degraba 1990 we find a relationship between the changes in welfare and total output strikingly it states that an increase in the total output of the final good is a sufficient condition for welfare deterioration this result contrasts with that obtained by schmalensee 1981 varian 1985 and schwartz 1990 from usual models of price discrimination in a final good market section iii concludes the analysis

helping minor firms reduces welfare the effect on national welfare of uneven technical progress and eli mination of a firm is analyzed under the existence of a cournot oligopolistic sector an increase in the share of an inefficient firm owing to its innovations results in a shift of production from more efficient firms to the inefficient firm causing a less efficie nt allocation of production it may decrease welfare even though the innovation itself is beneficial conversely policies keeping ineffic ient firms from innovations or eliminating them may increase welfare though they make the market structure more oligopolistic copyright 1988 by royal economic society

an empirical investigation of the welfare effects of banning wholesale price discrimination rand 054 rand2007 cls 1994 07 13 v1 2u standard latex document class rand rand 054 dispatch 12 7 2008 ce n a journal msp no no of pages 26 pe sharon rand journal of economics vol 40 no 1 spring 2009 pp 20 45 an empirical investigation of the welfare effects of banning wholesale price discrimination sofia berto villas boas economic theory does not provide sharp predictions on the welfare effects of banning wholesale price discrimination if downstream cost differences exist then discrimination shifts production inefficiently toward high cost retailers so a ban increases welfare if differences in price elasticity of demand across retailers exist discrimination may increase welfare if quantity sold increases so a ban reduces welfare using retail prices and quantities of coffee brands sold by german retailers i estimate a model of demand and supply and separate cost and demand differences simulating a ban on wholesale price discrimination has positive welfare effects in this market and less if downstream cost differences shrink or with less competition introduction wholesale price discrimination means that an upstream firm sets different prices for the same product for various downstream retailers wholesale price discrimination is commonly practiced in many markets examples include markets such as petroleum distribution steel heavy trucking tobacco and pharmaceuticals in several countries milk and other dairy products are sold using government administered or sanctioned discriminatory pricing schemes wholesale price discrimination practices are also used for services such as loans insurance and advertising 1 competition authorities have been concerned with wholesale price discrimination the european union treaty s article 82 c prohibits practices where a dominant firm would place trading partners at a competitive disadvantage the u s robinson patman act forbids discriminat ing in price between different purchasers where the effect may be to lessen competition unless the university of california berkeley sberto are berkeley edu i thank the editor igal hendel and two anonymous referees for many helpful comments and max auffhammer cyndi berck peter berck gal hochman silke januszewski forbes george judge kai uwe k uhn diana lazo mark muendler aviv nevo ariel pakes jeff perloff andrew sweeting miguel villas boas and participants at uc san diego university of michigan the inra idei conference in toulouse and the university of british columbia summer conference in industrial organization for their suggestions i thank daniel klapper for letting me have access to the data support from the giannini foundation and from an aes grant are gratefully appreciated see for gasoline markets texaco v hasbrouck 496 us 543 no 87 2048 1990 and the new york state motor fuel marketing practices act for steel chan hall and rust 2003 for heavy trucking volvo trucks north america inc v reeder simco gmc inc docket no 04 905 for tobacco brooke group ltd v brown and williamson tobacco corp 509 us 209 no 92 466 1993 for wholesale pharmaceuticals see http www datcp state wi us trade business unfair comp drug price jsp for dairy markets see for example gardner 1984 and for services see givens 1983 c 2009 rand copyright

monopolistic third degree price discrimination under vertical product differentiation this paper shows in a vertical product differentiation model with variable costs of quality that monopolistic third degree price discrimination always reduces welfare regardless of whether the quality is fixed or is endogenous the results provide rich implications for antitrust policy

input market price discrimination and the choice of technology recent concerns over the effects of the robinson patman act and so called priceprotection policies such as most favoredcustomer clauses mfc s 2 on market performance have given economists new reasons to examine the welfare effects of third degree price discrimination in order to assess these effects correctly it is imperative that one understand how price discrimination influences market behavior joan robinson s 1933 work launched the formal inquiry into the welfare effects of third degree price discrimination building on the intuition presented by arthur pigou 1932 she showed that if a monopolist faces two independent linear demand curves the use of price discrimination will not affect industry output but will reduce welfare richard schmalensee 1981 extends these results to nonlinear demand curves and shows that an increase in total industry output is a necessary condition for price discrimination to be welfare improving hal varian 1985 broadens these results by deriving upper and lower bounds on the welfare change due to the use of price discrimination he shows that these results can be applied to markets in which there are nonzero cross price effects all of this work examines how the ability of a monopolist to price discriminate will affect the market outcome when all other characteristics of the market are treated as exogenous recently two lines of research have extended this inquiry beyond the case of a monopolist in a market with exogenously fixed parameters the first line considers the case of oligopoly the work of charles holt and david scheffman 1985 and thomas cooper 1986 has shown that restrictions on price discrimination imposed by the use of mfc s can facilitate collusion between oligopolists attempting to restrict output this implies that third degree price discrimination can be welfare improving the second line of research shows that price discrimination by a firm can affect nonprice decisions made by other market participants thus affecting the market outcome michael katz 1987 presents a model in which a large firm s ability to vertically integrate backward into the production of an input allows it to obtain a lower per unit price from the supplier of the input than can be obtained by smaller firms without this ability he shows that third degree price discrimination reduces welfare unless it prevents inefficient backward integration degraba 1987 shows that the use or nonuse of price discrimination by a national firm can affect nonprice decisions made by local firms that compete with the national firm in this situation third degree price discrimination is welfare reducing because it induces local firms to produce a product that is overly differentiated from the product of the national firm in all of the work cited above price discrimination is important when sellers set prices in separate markets or charge different prices to different customers in the same market the following analysis which can be considered a contribution to the second line of research suggests that price discrimination can be important even when a seller faces a single market in which all customers are identical the intuition behind this result is that nonprice decisions made by downstream producers such as the choice of technology can be affected by the use or johnson graduate school of management cornell university ithaca ny 14853 i thank robert frank robert smiley richard thaler and the participants of the jgsm applied microeconomics workshop for their helpful comments see william baldwin 1987 pp 438 40 for a good summary of the debate 2see john kwoka and lawrence white 1989 pp 196 7