Size-based Input Price Discrimination Under Endogenous Inside Options

Individual retailers may choose to invest in a substitute dominant supplier’s products (inside option) as way of improving its position towards the supplier. Given that large retailer has stronger investment incentives than smaller rival, obtain selective rebate (size-based price discrimination). Yet, we often observe suppliers do not discriminate between differ size. Why is this so? We argue explanation be related competitive pressure among retailers. The more fiercely compete, each cares about relative input prices. Other things equal, implies will greater pressure. show if sufficiently strong, supplier can profitably incentivize reduce investments substitutes by committing charge uniform price. Furthermore, under pricing, induce rivals exit market strategically underinvesting inside options.