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 marker 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 has the incentive to raise the costs of the rivals to its subsidiary in a discriminatory fashion, but does not have the incentive 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.