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Inducing Downstream Selling Effort with Market Share Discounts

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  • David Mills

Abstract

Loyalty discounts and rebates are pricing schemes that offer incentives to buyers for reaching or exceeding certain sales thresholds. In the case of market share discounts, thresholds are expressed as a percentage of the buyer's total purchase requirements. Although market share discounts may have exclusionary effects under certain circumstances when a seller has significant market power, there are plausible non-exclusionary reasons for offering them as well. Two such reasons - rent extraction and inducing downstream selling effort - are explored in this paper. The paper considers the case of a manufacturer who sells a differentiated good through a network of heterogeneous, non-exclusive retailers. The manufacturer offers market share discounts to induce non-contractible selling effort such as brand-specific information or customer service from those retailers who possess certain unobservable characteristics. In some instances, market share discounts induce increased selling effort and improve market performance as compared to linear pricing. In other instances, they have no effect on aggregate benefits, but merely shift the rents created by induced selling effort upstream to the manufacturer. In no instance, as long as the producers of substitute goods retain sufficient sales to remain viable, do market share discounts impair market performance.

Suggested Citation

  • David Mills, 2010. "Inducing Downstream Selling Effort with Market Share Discounts," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 17(2), pages 129-146.
  • Handle: RePEc:taf:ijecbs:v:17:y:2010:i:2:p:129-146
    DOI: 10.1080/13571516.2010.483082
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    References listed on IDEAS

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    1. Dennis W. Carlton & Ken Heyer, 2008. "Appropriate Antitrust Policy Towards Single-Firm Conduct," EAG Discussions Papers 200802, Department of Justice, Antitrust Division.
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    Cited by:

    1. Ugur Akgun & Ioana Chioveanu, 2012. "Loyalty Discounts," CEDI Discussion Paper Series 12-07, Centre for Economic Development and Institutions(CEDI), Brunel University.
    2. Calzolari, Giacomo & Denicolò, Vincenzo, 2011. "On the anti-competitive effects of quantity discounts," International Journal of Industrial Organization, Elsevier, vol. 29(3), pages 337-341, May.
    3. Katja Greer, 2013. "Limiting rival's efficiency via conditional discounts," Working Papers 132, Bavarian Graduate Program in Economics (BGPE).
    4. Zhijun Chen & Greg Shaffer, 2014. "Naked exclusion with minimum-share requirements," RAND Journal of Economics, RAND Corporation, vol. 45(1), pages 64-91, March.

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