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Competition with exclusive contracts and market-share discounts

Author

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  • Calzolari, Giacomo
  • Denicolo, Vincenzo

Abstract

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.

Suggested Citation

  • Calzolari, Giacomo & Denicolo, Vincenzo, 2009. "Competition with exclusive contracts and market-share discounts," CEPR Discussion Papers 7613, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7613
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    References listed on IDEAS

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    More about this item

    Keywords

    Exclusionary contracts; Market share discounts; Price competition; Common agency;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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