Thursday, February 18, 2010
Posted by D. Daniel Sokol
Giacomo Calzolari, University of Bologna - Department of Economics, and Vincenzo Denicolò, University of Bologna - Department of Economics describe Competition with Exclusive Contracts and Market-Share Discounts.
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.