This article analyses the use of loyalty inducing discounts in vertical supply chains. An upstream supplier and a competitive fringe sell differentiated products to a retailer who has private information about the stochastic demand. We compare the market outcomes, when the supplier uses two-part tariffs (2PT), all-unit quantity discounts (AU), and market-share discounts (MS). We show that the retailer’s risk attitude affects supplier’s preferences over these pricing schemes. When the retailer is risk neutral, it bears all the risk and the three schemes lead to the same outcome. When the retailer is risk averse, a 2PT performs the worst from the supplier’s perspective, but it leads to the highest welfare. For a wide range of parameter values (but not for all), the supplier prefers MS to AU. By limiting the retailer’s product substitution possibilities, MS makes the demand for the manufacturer’s product more inelastic. This reduces the amount (share of total profits) the supplier needs to leave to the retailer for the latter to participate in the scheme.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 13 (2013)
Issue (Month): 2 (September)
|Contact details of provider:|| Web page: https://www.degruyter.com|
|Order Information:||Web: https://www.degruyter.com/view/j/bejeap|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Akgün Uğur & Chioveanu Ioana, 2013.
The B.E. Journal of Economic Analysis & Policy,
De Gruyter, vol. 13(2), pages 655-685, September.
- Ioana Chioveanu & Ugur Akgun, 2011. "Loyalty discounts," Working Papers. Serie AD 2011-03, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- 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.
- Serguei Maliar & Lilia Maliar & Kenneth L. Judd, 2010. "Solving the Multi-Country Real Business Cycle Model Using Ergodic Set Methods," NBER Working Papers 16304, National Bureau of Economic Research, Inc.
- Kenneth Judd & Lilia Maliar & Serguei Maliar, 2011. "Solving the multi-country real business cycle model using ergodic set methods," Working Papers. Serie AD 2011-01, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- Sloev, Igor, 2007. "Market Share Discounts and Investment Incentives," MPRA Paper 13990, University Library of Munich, Germany.
- Gual, Jordi & Hellwig, Martin & Perrot, Anne & Polo, Michele & Rey, Patrick & Schmidt, Klaus M. & Stenbacka, Rune, 2005. "An Economic Approach to Article 82 - Report by the European Advisory Group on Competition Policy," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 82, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Greenlee, Patrick & Reitman, David & Sibley, David S., 2008. "An antitrust analysis of bundled loyalty discounts," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1132-1152, September.
- Sreya Kolay & Greg Shaffer & Janusz A. Ordover, 2004. "All-Units Discounts in Retail Contracts," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(3), pages 429-459, 09. Full references (including those not matched with items on IDEAS)