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All-units discounts and double moral hazard

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  • O'Brien, Daniel P.

Abstract

An all-units discount is a price reduction applied to all units purchased if the customer's total purchases equal or exceed a given quantity threshold. Since the discount is paid on all units rather than marginal units, the tariff is discontinuous and exhibits a negative marginal price (“cliff”) at the threshold that triggers the discount. This paper shows that all-units discounts arise in optimal agency contracts between upstream and downstream firms that face double moral hazard. I present conditions under which all-units discounts dominate two-part tariffs and other continuous tariffs. I also examine these tariffs when the upstream market faces a threat of entry. In the case considered, all-units discounts deter entry by less efficient rivals without distorting price and investment, whereas continuous tariffs either accommodate such entry or deter it by distorting price and investment.

Suggested Citation

  • O'Brien, Daniel P., 2017. "All-units discounts and double moral hazard," Journal of Economic Theory, Elsevier, vol. 170(C), pages 1-28.
    • Handle: RePEc:eee:jetheo:v:170:y:2017:i:c:p:1-28
    DOI: 10.1016/j.jet.2017.02.001
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    References listed on IDEAS

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    More about this item

    Keywords

    All-units discounts; Retroactive rebates; Double marginalization; Double moral hazard; Partnerships; Teams;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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