Input Price Discrimination and Social Welfare in the Presence of Technology Licensing

The literature on input price discrimination has shown that third-degree price discrimination by an upstream firm is welfare-deteriorating as the upstream firm charges more (less) efficient downstream firms a higher (lower) input price which distorts the production efficiency. (See, for example, Katz (1987) and DeGraba (1990)) In this paper, we examine the welfare effect of third-degree input price discrimination in the presence of technology licensing by an outside innovator in a vertically related market with one upstream monopolist and n homogeneous downstream oligopolists. It is found that the innovator tends to license its technology to more downstream firms if the upstream firm engages in discriminatory pricing. This improves the overall production efficiency of the downstream firms and makes discriminatory pricing more socially desirable than uniform pricing, which is opposite to the general outcome in the literature.