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Loyalty Discounts

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Akgün Uğur & Chioveanu Ioana, 2013. "Loyalty Discounts," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(2), pages 655-685, September.
    • Handle: RePEc:bpj:bejeap:v:13:y:2013:i:2:p:655-685:n:9
    DOI: 10.1515/bejeap-2012-0047
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    References listed on IDEAS

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    Cited by:

    1. Greer, Katja, 2013. "Limiting rival's efficiency via conditional discounts," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79730, Verein für Socialpolitik / German Economic Association.
    2. Katja Greer, 2013. "Limiting rival's efficiency via conditional discounts," Working Papers 132, Bavarian Graduate Program in Economics (BGPE).
    3. Akgün Uğur & Chioveanu Ioana, 2013. "Loyalty Discounts," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(2), pages 655-685, September.
    4. Jorge Gonzalez Chapela, 2011. "Recreation, home production, and intertemporal substitution of female labor supply: evidence on the intensive margin," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 532-548, July.
    5. Roman Inderst & Greg Shaffer, 2010. "Market‐share contracts as facilitating practices," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 709-729, December.
    6. Amemiya Yuki & Kitamura Hiroshi & Oshiro Jun, 2014. "Market-Share Contracts with Vertical Externalities," Asian Journal of Law and Economics, De Gruyter, vol. 5(1-2), pages 1-15, December.
    7. Eberhard Feess & Ansgar Wohlschlegel, 2010. "All-Unit Discounts and the Problem of Surplus Division," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 37(3), pages 161-178, November.

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    More about this item

    JEL classification:

    • 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

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