The Incentive for Non-Price Discrimination by an Input Monopolist

This paper considers the incentive for non-price discrimination of a monopolist 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 through discriminatory quality degradation. We find that the monopolist always, even when it is cost-disadvantaged, has the incentive not to raise costs to the whole downstream industry including its subsidiary. Moreover, increasing rivals' costs nullifies the effects of traditional imputation floors, and prompts the creation of imputation floors that account for the artificial costs imposed on downstream rivals. The results of this paper raise concerns about the potentially anti-competitive effects of entry of local exchange carriers in long distance service.