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Competition with exclusive contracts and market-share discounts

  • Calzolari, Giacomo
  • Denicolò, Vincenzo

We study the effects of exclusive contracts and market-share discounts (i.e., discounts conditioned on the share a firm receives of the customer’s total purchases) in an adverse selection model where firms supply differentiated products and compete in non-linear prices. We show that exclusive contracts intensify the competition among the firms, increasing consumer surplus, improving efficiency, and reducing profits. Firms would gain if these contracts were prohibited, but are caught in a prisoner’s dilemma if they are permitted. In this latter case, allowing firms to offer also market-share discounts unambiguously weakens competition, reducing efficiency and harming consumers. However, starting from a situation where exclusive contracts are prohibited, the effect of market-share discounts (which include exclusive contracts as a limiting case) is ambiguous.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7613.

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Date of creation: Dec 2009
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Handle: RePEc:cpr:ceprdp:7613
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  1. Marc IVALDI & David MARTIMORT, 1994. "Competition under Nonlinear Pricing," Annales d'Economie et de Statistique, ENSAE, issue 34, pages 71-114.
  2. Armstrong, M. & Cowan, S. & Vickers, J., 1992. "Nonlinear Pricing and Price Cap Regulation," Economics Series Working Papers 99152, University of Oxford, Department of Economics.
  3. Elyakime, Bernard & Laffont, Jean-Jacques & Loisel, Patrice & Vuong, Quang, 1993. "First-Price Sealed-Bid Auctions with Secret Reservation Prices," IDEI Working Papers 27, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July.
  5. Giacomo Calzolari & Alessandro Pavan, 2007. "Truthful Revelation Mechanisms for Simultaneous Common Agency Games," Discussion Papers 1458, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. David Martimort & Lars Stole, 2009. "Market participation in delegated and intrinsic common-agency games," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 78-102.
  7. David Martimort & Lars Stole, 2001. "The Revelation and Delegation Principles in Common Agency Games," CESifo Working Paper Series 575, CESifo Group Munich.
  8. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
  9. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
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