AbstractThis 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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Bibliographic InfoPaper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2011-03.
Length: 24 pages
Date of creation: Feb 2011
Date of revision:
Publication status: Published by Ivie
vertical contracts; loyalty discounts; private information; market share discounts.;
Other versions of this item:
- J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
- J12 - Labor and Demographic Economics - - Demographic Economics - - - Marriage; Marital Dissolution; Family Structure
- J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth
This paper has been announced in the following NEP Reports:
- NEP-AGR-2011-03-05 (Agricultural Economics)
- NEP-ALL-2011-03-05 (All new papers)
- NEP-COM-2011-03-05 (Industrial Competition)
- NEP-CTA-2011-03-05 (Contract Theory & Applications)
- NEP-MKT-2011-03-05 (Marketing)
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