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Promotional allowances

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Abstract

We study a setting of repeated trade between an upstream manufacturer and two downstream retailers that can exert valuable but noncontractible sales effort. Our focus is the manufacturer’s use of relational contracts with discretionary promotional allowances – payments that reward retailers for effort provision. We show that such contracts enable a sufficiently patient manufacturer to, in equilibrium, provide retailers with the correct incentives and extract the maximal industry profit in every period, and that this outcome cannot be replicated with formal two-part tariffs. These results have implications for the policy treatment of lump-sum payments from manufacturers to retailers, as well as for resale price maintenance.

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  • Lømo, Teis Lunde & Ulsaker, Simen Aardal, 2016. "Promotional allowances," Working Papers in Economics 08/16, University of Bergen, Department of Economics.
    • Handle: RePEc:hhs:bergec:2016_008
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    More about this item

    Keywords

    Vertical restraints; Retail services; Repeated games; Relational contracts; Competition policy;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • 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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