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Market-Share Contracts as Facilitating Practices

Author

Listed:
  • Roman Inderst

    (University of Frankfurt and Imperial College London)

  • Greg Shaffer

    (University of Rochester and University of East Anglia)

Abstract

This article investigates how the use of contracts that condition discounts on the share a supplier receives of a retailer's total purchases (market-share contracts) may affect market outcomes. The case of a dominant supplier that distributes its product through retailers that also sell substitute products is considered. It is found that when the supplier's contracts can only depend on how much a retailer purchases its product (own-supplier contracts), both intra- and inter-brand competition cannot simultaneously be dampened. However, competition on all goods can simultaneously be dampened when market-share contracts are feasible. Compared to ownsupplier contracts, the use of market-share contracts increases the dominant supplier's profit and, if demand is linear, lowers consumer surplus and welfare.

Suggested Citation

  • Roman Inderst & Greg Shaffer, 2010. "Market-Share Contracts as Facilitating Practices," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2010-13, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    • Handle: RePEc:uea:ueaccp:2010_13
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    References listed on IDEAS

    as
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