Price Discrimination between Retailers with and without Market Power

This paper studies the pricing strategies and ontract choice of an up-stream manufacturer who sells to both competitive and monopolistic re-tailers in different locations. To prevent arbitrage, he sets the wholesale price difference between locations smaller than the transportation cost. This magnifies the problem of double marginalization. When some re-tail markets become more competitive, the manufacturer reacts in monop-olized markets by (i) charging a higher wholesale price, (ii) using linear contracts instead of two-part tariffs, and (iii) closing down markets. Ban-ning price discrimination can cause the manufacturer to switch to use an inferior type of contracts and to close markets, reducing welfare