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Efficiency and Foreclosure Effects of Vertical Rebates: Empirical Evidence

Author

Listed:
  • Christopher T. Conlon
  • Julie Holland Mortimer

Abstract

In many industries, upstream manufacturers pay downstream retailers for achieving quantity or market share targets. These “vertical rebates” may mitigate downstream moral hazard by inducing greater retail effort but may also incentivize retailers to drop competing products. We study these offsetting effects empirically for a rebate paid to one retailer. Using a field experiment, we exogenously vary the outcome of retailer effort. We estimate models of consumer choice and retailer behavior to quantify the rebate’s effect on retail assortment and effort. We find that the rebate is designed to exclude a competing product and fails to maximize social surplus.

Suggested Citation

  • Christopher T. Conlon & Julie Holland Mortimer, 2021. "Efficiency and Foreclosure Effects of Vertical Rebates: Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 129(12), pages 3357-3404.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/716563
    DOI: 10.1086/716563
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    Citations

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    Cited by:

    1. Bogdan Genchev & Julie Holland Mortimer, 2016. "Empirical Evidence on Conditional Pricing Practices," Boston College Working Papers in Economics 908, Boston College Department of Economics.
    2. Sylvia Hristakeva, 2022. "Determinants of Channel Profitability: Retailers’ Control over Product Selections as Contracting Leverage," Marketing Science, INFORMS, vol. 41(2), pages 315-335, March.
    3. Bowen Luo, 2024. "Manufacturer–Retailer Relationships and the Distribution of New Products," Marketing Science, INFORMS, vol. 43(1), pages 114-137, January.
    4. Gianluca Antonecchia & Ajay Bhaskarabhatla & Enrico Pennings, 2024. "Bargaining Power and Quantity Discounts to Retailers: Evidence from India’s Pharmaceutical Industry," Tinbergen Institute Discussion Papers 24-048/VII, Tinbergen Institute.
    5. Li, Jia & Moul, Charles C., 2015. "Who should handle retail? Vertical contracts, customer service, and social welfare in a Chinese mobile phone market," International Journal of Industrial Organization, Elsevier, vol. 39(C), pages 29-43.
    6. repec:ags:aaea22:343858 is not listed on IDEAS
    7. Murry, Charles, 2018. "The effect of retail competition on relationship-specific investments: evidence from new car advertising," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 253-281.
    8. Steven Berry & Martin Gaynor & Fiona Scott Morton, 2019. "Do Increasing Markups Matter? Lessons from Empirical Industrial Organization," Journal of Economic Perspectives, American Economic Association, vol. 33(3), pages 44-68, Summer.
    9. Yong Chao & Guofu Tan & Adam Chi Leung Wong, 2018. "All†units discounts as a partial foreclosure device," RAND Journal of Economics, RAND Corporation, vol. 49(1), pages 155-180, March.
    10. Amit Gandhi & Jean-François Houde, 2019. "Measuring Substitution Patterns in Differentiated-Products Industries," NBER Working Papers 26375, National Bureau of Economic Research, Inc.
    11. Arthur Lewbel, 2019. "The Identification Zoo: Meanings of Identification in Econometrics," Journal of Economic Literature, American Economic Association, vol. 57(4), pages 835-903, December.
    12. Chao, Yong & Tan, Guofu & Wong, Adam Chi Leung, 2019. "Asymmetry in capacity and the adoption of all-units discounts," International Journal of Industrial Organization, Elsevier, vol. 65(C), pages 152-172.
    13. Enrique Ide & Juan-Pablo Montero & Nicolás Figueroa, 2016. "Discounts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 106(7), pages 1849-1877, July.

    More about this item

    JEL classification:

    • L00 - Industrial Organization - - General - - - General
    • L4 - Industrial Organization - - Antitrust Issues and Policies
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • L8 - Industrial Organization - - Industry Studies: Services
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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