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Settling for Coupons: Discount Contracts as Compensation and Punishment in Antitrust Lawsuits

Listed author(s):
  • Severin Borenstein

A number of recent antitrust lawsuits have been settled with discount contracts in which the defendants agree in the future to sell to the plaintiffs at a discount off of the price they offer to other buyers. Economists often object to such settlements, arguing that the sellers will partially or fully offset these discounts by increasing the baseline price from which the discount is calculated. This paper shows that poorly structured discount contracts will indeed result in price increases for other buyers and that other buyers, not the sellers, are likely to bear most of the cost imposed by the settlement. Carefully formulated discount settlements, however, can avoid giving the sellers an incentive to raise prices to buyers not covered by the settlement. In such cases, the defendant bears the full cost of the settlement. I suggest that poorly structured settlements still take place because their costs are borne primarily by consumers who are not parties to these cases.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5085.

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Date of creation: Apr 1995
Publication status: published as Journal of Law and Economics, October 1996, vol.39, no.2, pp.379-404.
Handle: RePEc:nbr:nberwo:5085
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  1. Judith R. Gelman & Steven C. Salop, 1983. "Judo Economics: Capacity Limitation and Coupon Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 315-325, Autumn.
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