The Incentive for Non-Price Discrimination by an Input Monopolist*

by Nicholas Economides**
January 1997

Abstract 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 though 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.

Key words: monopoly, discrimination,
vertical integration JEL classification: L1, D4