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Promotional Allowances: Loss Leading as an Incentive Device

Author

Listed:
  • David Martimort

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Jerome Pouyet

    (ESSEC Business School and THEMA (UMR 8184) - ESSEC Business School - THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)

Abstract

A retailer can boost demand for a manufacturer's product through unobservable activities. Promotional allowances, which are retrospective rebates tied to the success of the retailer's promotional efforts, can partially mitigate the resulting moral hazard problem. In equilibrium, the wholesale contract includes a retail price set below cost, complemented by a rebate for incremental units purchased when promotional efforts successfully increase sales. Loss leading thus emerges as an incentive mechanism, rather than a practice driven by anti-competitive or exploitative intent. A ban on below-cost pricing leads to higher retail prices and reduced promotional efforts.

Suggested Citation

  • David Martimort & Jerome Pouyet, 2024. "Promotional Allowances: Loss Leading as an Incentive Device," Working Papers halshs-04684854, HAL.
    • Handle: RePEc:hal:wpaper:halshs-04684854
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-04684854v2
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    Keywords

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    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • 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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