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Loyalty Discounts

Listed author(s):
  • Akgün Uğur

    ()

    (Charles Rivers Associates, 99 Bishopsgate, London EC2M 3XD, UK)

  • Chioveanu Ioana

    ()

    (Department of Economics and Finance, Brunel University London, Uxbridge UB8 3PH, UK)

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.

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File URL: https://www.degruyter.com/view/j/bejeap.2013.13.issue-2/bejeap-2012-0047/bejeap-2012-0047.xml?format=INT
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Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 13 (2013)
Issue (Month): 2 (September)
Pages: 655-685

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Handle: RePEc:bpj:bejeap:v:13:y:2013:i:2:p:655-685:n:9
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  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. 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.
  3. Sloev, Igor, 2007. "Market Share Discounts and Investment Incentives," MPRA Paper 13990, University Library of Munich, Germany.
  4. 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.
  5. 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.
  6. 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.
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