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Competition with exclusive contracts and market-share discounts

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  • Calzolari, Giacomo
  • Denicolo, Vincenzo

Abstract

We study the effects of exclusive contracts and market-share discounts (i.e., discounts conditioned on the share a firm receives of the customer’s total purchases) in an adverse selection model where firms supply differentiated products and compete in non-linear prices. We show that exclusive contracts intensify the competition among the firms, increasing consumer surplus, improving efficiency, and reducing profits. Firms would gain if these contracts were prohibited, but are caught in a prisoner’s dilemma if they are permitted. In this latter case, allowing firms to offer also market-share discounts unambiguously weakens competition, reducing efficiency and harming consumers. However, starting from a situation where exclusive contracts are prohibited, the effect of market-share discounts (which include exclusive contracts as a limiting case) is ambiguous.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7613.

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Date of creation: Dec 2009
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Handle: RePEc:cpr:ceprdp:7613

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Related research

Keywords: common agency; exclusionary contracts; market share discounts; price competition;

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References

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  1. Alessandro Pavan & Giacomo Calzolari, 2010. "Truthful Revelation Mechanisms for Simultaneous Common Agency Games," American Economic Journal: Microeconomics, American Economic Association, vol. 2(2), pages 132-90, May.
  2. Elyakime, Bernard & Laffont, Jean-Jacques & Loisel, Patrice & Vuong, Quang, 1993. "First-Price Sealed-Bid Auctions with Secret Reservation Prices," IDEI Working Papers 27, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Ivaldi, M. & Martimort, D., 1992. "Competition Under Nonlinear Pricing," Papers 93.288, Toulouse - GREMAQ.
  4. Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July.
  5. Armstrong, M. & Cowan, S. & Vickers, J., 1992. "Nonlinear Pricing and Price Cap Regulation," Economics Series Working Papers 99152, University of Oxford, Department of Economics.
  6. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
  7. David Martimort & Lars Stole, 2009. "Market participation in delegated and intrinsic common-agency games," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 78-102.
  8. David Martimort & Lars Stole, 2002. "The Revelation and Delegation Principles in Common Agency Games," Econometrica, Econometric Society, vol. 70(4), pages 1659-1673, July.
  9. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
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Citations

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Cited by:
  1. Calzolari, Giacomo & Denicolò, Vincenzo, 2010. "Competitive quantity discounts," CEPR Discussion Papers 8144, C.E.P.R. Discussion Papers.
  2. Mark Armstrong, 2012. "A More General Theory of Commodity Bundling," Economics Series Working Papers 624, University of Oxford, Department of Economics.
  3. Martimort, David & Stole, Lars, 2011. "Public Contracting in Delegated Agency Games," MPRA Paper 32874, University Library of Munich, Germany.
  4. Frank Maier-Rigaud & Ulrich Schwalbe, 2013. "Do Retroactive Rebates Imply Lower Prices for Consumers?," Working Papers 2013-ECO-10, IESEG School of Management.
  5. Hoernig, Steffen & Valletti, Tommaso, 2010. "When two-part tariffs are not enough: Mixing with nonlinear pricing," CEPR Discussion Papers 7720, C.E.P.R. Discussion Papers.
  6. Philippe Choné & Laurent Linnemer, 2011. "Leaving the Door Ajar : Nonlinear Pricing by a Dominant Firm," Working Papers 2011-16, Centre de Recherche en Economie et Statistique.
  7. Armstrong, Mark, 2010. "Bundling revisited: substitute products and inter-firm discounts," MPRA Paper 26782, University Library of Munich, Germany.
  8. Philippe Choné & Laurent Linnemer, 2012. "Nonlinear Pricing as Exclusionary Conduct," Working Papers 2012-11, Centre de Recherche en Economie et Statistique.
  9. Calzolari, Giacomo & Denicolò, Vincenzo, 2011. "On the anti-competitive effects of quantity discounts," International Journal of Industrial Organization, Elsevier, vol. 29(3), pages 337-341, May.

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