Anticompetitive Effects of a Dominant Retailer’s Guaranteed Profit Margin and Low-Price Contracts

A retailer can insist on a guaranteed margin contract with its supplier, wherein it requires a margin on each sale. In addition, it may want to have the lowest selling price in a market with competing retailers, and if this strategy of offering the lowest price reduces its margin, the supplier must pay up the difference. There has been recent debate on whether this approach leads to anticompetitive behavior with elevated retail prices, monopolistic market, or diminished market coverage. We analyze a game-theoretic model involving a supplier and two retailers where the focal retailer adopts either the guaranteed margin contract or the guaranteed margin contract with lowest price guarantee. We show that when product category competition is intense, the guaranteed margin contract is anticompetitive: The supplier forms an exclusive distribution with the focal retailer leading to higher prices and reduced product access in comparison with when they both adopt a wholesale price contract. However, if the intensity of competition is low, consumers benefit by paying lower prices with wider access as long as the supplier sets identical wholesale prices, but prices remain higher when they set differentiated wholesale prices. The guaranteed margin contract with lowest price guarantee, however, always leads to higher prices by dampening competition. As such, the ability of the focal retailer to choose the contract type and the intensity of product category competition leads to outcomes that can either benefit or hurt consumers. Our results help inform policy makers on the necessary interventions to alleviate anticompetitiveness.