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Promotional Allowances: Loss Leading as an Incentive Device

Author

Listed:
  • Martimort, David
  • Pouyet, Jerome

Abstract

A retailer may boost demand for a manufacturer's product through unobservable promotional efforts. Fixed fees cannot be used to freely allocate profit within the vertical structure. When manufacturers have market power, the equilibrium wholesale contract features a retail price below cost together with a rebate for incremental units bought by the retailer when effort has succeeded in boosting sales. Loss leading emerges as an incentive device in such an incomplete contracting scenario. A ban on below-cost pricing leads to a higher retail price and a lower promotional effort.

Suggested Citation

  • Martimort, David & Pouyet, Jerome, 2024. "Promotional Allowances: Loss Leading as an Incentive Device," CEPR Discussion Papers 19474, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19474
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    File URL: https://cepr.org/publications/DP19474
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    More about this item

    JEL classification:

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

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