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Market‐share contracts as facilitating practices

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  • Roman Inderst
  • Greg Shaffer

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 of its product (own‐supplier contracts), intra‐ and interbrand competition cannot simultaneously be dampened. However, competition on all goods can simultaneously be dampened when market‐share contracts are feasible. Compared to own‐supplier 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," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 709-729, December.
    • Handle: RePEc:bla:randje:v:41:y:2010:i:4:p:709-729
    DOI: 10.1111/j.1756-2171.2010.00118.x
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