Limiting rival's efficiency via conditional discounts
AbstractThis paper studies the impact of a dominant firm's conditional discounts on competitors' learning-by-doing. In a vertical context where a dominant upstream supplier and a competitive fringe sell their products to a single downstream firm, we analyze whether the dominant supplier prefers to offer a discount scheme, as in particular a quantity or market-share discount. In a dynamic setting with complete information and learning-by-doing, short-term market-share discounts and long-run contracts are more profitable to the dominant supplier than simple two-part tariffs or quantity discounts. We show that two-part tariffs as well as quantity discounts lead to more learning than market-share discounts, or long-term contracts. Thus, the dominant firm's contract choice restricts the competitive fringe's efficiency gain. Similar results occur for network effects.
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Bibliographic InfoPaper provided by Bavarian Graduate Program in Economics (BGPE) in its series Working Papers with number 132.
Length: 34 pages
Date of creation: Feb 2013
Date of revision:
Market-share discounts; quantity discounts; learning-by-doing; dominant upstream supplier; competitive fringe.;
Find related papers by JEL classification:
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
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