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Loyalty discounts

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Author Info

  • Ioana Chioveanu

    ()
    (Universidad de Alicante)

  • Ugur Akgun

    ()
    (Charles Rivers Associates)

Abstract

This paper considers the use of loyalty inducing discounts in vertical supply chains. An upstream manufacturer and a competitive fringe sell differentiated products to a retailer who has private information about the level of stochastic demand. We provide an analysis of the market outcomes when the manufacturer uses two-part tariffs (2PT), all-unit discounts (AU) and market share discounts (MS). We show that retailer’s risk attitude affects manufacturer’s preferences over these three pricing schemes. When the retailer is risk-neutral, it bears all the risk and all three schemes lead to the same outcome. When the retailer is risk-averse, 2PT performs the worst from manufacturer’s perspective but it leads to the highest total surplus. For a wide range of parameter values (but not for all) the manufacturer prefers MS to AU. By limiting retailer’s product substitution possibilities MS makes the demand for manufacturer’s product more inelastic. This reduces the amount (share of profits) the manufacturer needs to leave to the retailer for the latter to participate in the scheme.

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File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2011-03.pdf
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Bibliographic Info

Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2011-03.

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Length: 24 pages
Date of creation: Feb 2011
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2011-03

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Related research

Keywords: vertical contracts; loyalty discounts; private information; market share discounts.;

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References

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  1. Maliar, Serguei & Maliar, Lilia & Judd, Kenneth, 2011. "Solving the multi-country real business cycle model using ergodic set methods," Journal of Economic Dynamics and Control, Elsevier, vol. 35(2), pages 207-228, February.
  2. Ioana Chioveanu & Ugur Akgun, 2011. "Loyalty discounts," Working Papers. Serie AD 2011-03, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
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Cited by:
  1. Akgün Uğur & Chioveanu Ioana, 2013. "Loyalty Discounts," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(2), pages 655-685, September.
  2. Jorge Gonzalez Chapela, 2011. "Recreation, home production, and intertemporal substitution of female labor supply: evidence on the intensive margin," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 532-548, July.
  3. Greer, Katja, 2013. "Limiting rival's efficiency via conditional discounts," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79730, Verein für Socialpolitik / German Economic Association.
  4. Eberhard Feess & Ansgar Wohlschlegel, 2010. "All-Unit Discounts and the Problem of Surplus Division," Review of Industrial Organization, Springer, vol. 37(3), pages 161-178, November.

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