(2004) have usefully identified an error in our initial Proposition 2 (McAfee and Schwartz, 1994). In our view, this reveals a serious flaw in our modeling, but does not affect our basic point about the ineffectiveness of nondiscrimination clauses for deterring opportunistic recontracting when contracts involve two-part tariffs or other nonlinear pricing, instead of only per-unit prices. Let us briefly recap our finding. Consider a monopolist input supplier M with constant marginal cost z that can sell to symmetric and imperfectly competitive downstream firms. The monopolist can offer each firm j a two-part tariff contract (r j , f j), where r j is a per-unit price for the input and f j is a fixed fee. Maximizing total industry profits requires selling to n Ն 2 firms (e.g., because their products are differentiated) and, because of their symmetry, at a common price, r* Ͼ z (r ϭ z would be optimal only with a monopolist downstream firm). Given imperfect competition, if all firms accept r* then each earns positive operating profit *. If M could commit to publicly observed offers before downstream competition occurs, it would offer and all would accept (r*, f*), f* ϭ *. Can this outcome be achieved when M contracts with each firm bilaterally but nondiscrimination clauses are feasible? We posited a game where M makes offers of contracts sequentially to firms 1 through n. Each firm can then invoke its nondiscrimination clause to replace its contract by any other that was accepted in the first round. Competition occurs once all firms have settled

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This article analyzes the welfare effects of monopoly differential pricing in the important, but largely neglected, case where costs of service differ across consumer groups. Cost‐based differential pricing is shown to increase total welfare and consumer welfare relative to uniform pricing for broad classes of demand functions, even when total output falls or the output allocation between consumers worsens. We discuss why cost‐based differential pricing tends to be more beneficial for consumers than its demand‐based counterpart, third‐degree price discrimination. We also provide sufficient conditions for welfare‐improving differential pricing when costs and demands differ across consumer groups.

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The No Surcharge Rule (NSR) prevents merchants from charging more to consumers who pay by card versus other means ("cash"). We consider a payment network facing local monopolist merchants that serve two consumer groups, card users and cash users. Unlike in prior work, transaction quantities are variable. The NSR raises network profit and harms cash users and merchants; overall welfare rises if and only if the ratio of cash to card users is sufficiently large. With the NSR, the network will grant rebates to card users whenever feasible. If rebates are not feasible, the NSR can harm even card users.

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In contrast to Arrow's result for process innovations, we show that the gain from a product innovation can be larger to a secure monopolist than to a rivalrous firm that would face competition from independent sellers of the old product. A monopolist incurs profit diversion from its old good but may gain more than a rivalrous firm on the new good by coordinating the prices. In a Hotelling framework, we find simple conditions for the monopolist's gain to be larger. We also explain why the ranking of innovation incentives differs under vertical product differentiation.

Under network effects, we analyze when a firm with the largest market share of installed-base customers prefers incompatibility with smaller rivals that are themselves compatible. With incompatibility, consumers realize that intra-network competition makes the rivals' network more aggressive than a single-firm network in adding customers. Consequently, under incompatibility the unique equilibrium can entail tipping away from the largest firm whatever its market share. The largest firm is more likely to prefer incompatibility as its share rises (above fifty per cent is necessary) or the potential to add consumers falls; the number of rivals and strength of network effects have ambiguous implications.