THE INCENTIVE FOR NONPRICE DISCRIMINATION BY AN INPUT MONOPOLIST

This paper considers the incentive for non-price discrimination of a m onopolist in an input market who also sells in an oligopoly downstream market through a subsidiary. Such a monopolist can raise the costs of the rivals to its subsidiary though discriminatory quality degradatio n. I find that the monopolist always, even when it is cost-disadvantag ed, has the incentive to raise the costs of the rivals to its subsidia ry in a discriminatory fashion, but does not have the incentive to rai se costs to the whole downstream industry including its subsidiary. Mo reover, increasing rivals' costs nullifies the effects of traditional imputation floors, and prompts the creation of imputation floors that account for the artificial cost imposed on downstream rivals. The resu lts of this paper raise concerns about the potentially anti-competitiv e effects of entry of local exchange carriers in long distance service . The results may also suggest the imposition of certain unbundling an d technical specification disclosure requirements to monopolists in hi gh technology industries. (C) 1998 Elsevier Science B.V.