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Efficiency and Foreclosure Effects of All-Units Discounts: Empirical Evidence

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Listed:
  • Julie Mortimer

    (Boston College)

  • Christopher Conlon

    (Columbia University)

Abstract

We study an All-Units Discount, in which a downstream firm pays a linear wholesale price up to a quantity threshold, beyond which a discount applies to all future and previous units. Such contracts, which are common in many industries, potentially have both efficiency and foreclosure effects. We estimate a structural model of demand and retailer effort to quantify the efficiency gains induced by the contracts, and to identify cases in which the contract results in either efficient or inefficient exclusion of competing products. We show how the contract allocates the cost of a stock-out between upstream and downstream firms, and find evidence that the contract induces inefficient exclusion in the confection industry. Finally, we point out that the impact of upstream mergers in many markets is likely to be felt not through the price in the final-goods market, but rather in the wholesale market. We examine the impact of various upstream mergers on the willingness of the dominant firm to offer rebate contracts, and the impact that the rebate contracts have on social welfare.

Suggested Citation

  • Julie Mortimer & Christopher Conlon, 2014. "Efficiency and Foreclosure Effects of All-Units Discounts: Empirical Evidence," 2014 Meeting Papers 1177, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:1177
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    References listed on IDEAS

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    Cited by:

    1. Li, Jia & Moul, Charles C., 2015. "Who should handle retail? Vertical contracts, customer service, and social welfare in a Chinese mobile phone market," International Journal of Industrial Organization, Elsevier, vol. 39(C), pages 29-43.

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