Friday, November 2, 2018
Yong Chao, University of Louisville - College of Business - Department of Economics, Guofu Tan, University of Southern California - Department of Economics, and Adam Chi Leung Wong, Lingnan University - Department of Economics have an interesting paper on Competition Between Linear Pricing and All-Units Discounts Under Capacity Asymmetry.
ABSTRACT: Abstract In many recent abuse of dominance antitrust cases, the dominant supplier adopts pricing schemes involving conditional rebates, whereas its smaller competitors often use simple linear pricing. We provide a game-theoretic justification for the observed asymmetry in pricing practices by studying a model in which a supplier with full capacity faces a capacity-constrained rival. The asymmetry in capacity between the suppliers (or more generally be interpreted as factors such as distribution channels or ability to access to buyers), which gives rise to the “non-contestable” market, allows the dominant supplier to take advantage of the quantity commitment through all-units discounts while the capacity-constrained rival is induced to offer simple linear pricing.