Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Monday, April 22, 2013

All-Units Discounts and Double Moral Hazard

Posted by D. Daniel Sokol

Daniel P. O'Brien, Federal Trade Commission - Bureau of Economics has written on All-Units Discounts and Double Moral Hazard.

ABSTRACT: An all-units discount is a price reduction applied to all units purchased if the customer's total purchases equal or exceed a given quantity threshold. Since the discount is paid on all units rather than marginal units, the tariff is discontinuous and exhibits a negative marginal price at the threshold that triggers the discount. Why would suppliers offer such tariffs? This paper shows that all-units discounts can arise in optimal contracts between upstream and downstream firms with market power who make non-contractible investments that enhance demand. I present conditions under which all-units discounts dominate two-part tariffs and other continuous tariffs. I also examine these tariffs when the upstream market faces a threat of entry. In the cases considered, continuous tariffs are a more profitable device for managing entry than all-units discounts. These findings begin filling the gap in economists' understanding of the equilibrium effects of all-units discounts in intermediate markets in which contract design affects incentives for pricing, investment, and competitive entry.

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