By itself, the upstream manufacturer cannot implement a price discrimination sch

Question

By itself, the upstream manufacturer cannot implement a price discrimination scheme against downstream consumers because downstream retailers can defeat it. To see this, suppose that home gardeners and farmers both use the same herbicide. Home gardeners are willing to pay $5 for a one-liter spray bottle ($5 per liter), whereas farmers are willing to pay $600 for a 200-liter barrel ($3 per liter).

If the manufacturer tries to price discriminate (by pricing at $5 per liter to home retailers and $3 per liter to farm retailers), the farm retailers could buy herbicide in 200-liter barrels, put it in a small spray bottles, and sell it to home gardeners. By vertically integrating into retail operations, the manufacturer can prevent this kind of arbitrage. Note that the manufacturer has to integrate only into low-price retailing to accomplish this.

Question: Suppose the herbicide manufacturer can vertically integrate only into home gardening retailing. Would this allow the manufacturer to price discriminate?

Explanation / Answer

No, the firm will not be able to price discriminate. Because, when the vertical integration happens the manufacturer will have to settle for a single price for the elimination of arbitrage opportunities in the market.

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