Monday, October 22, 2018

Price-cost tests and loyalty discounts

Calzolari, Giacomo and Denicolò, Vincenzo analyze Price-cost tests and loyalty discounts.

ABSTRACT: We analyze, by means of a formal economic model, the use of price-cost tests to assess the competitive effects of loyalty discounts. In the model, a dominant firm enjoys a competitive advantage over its rivals and uses loyalty discounts as a means to boost the demand for its product. We show that in this framework price-cost tests are misleading or, at best, completely uninformative. Our results cast doubts on the applicability of price-tests to loyalty discount cases.

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