Limiting rival's efficiency via conditional discounts

Katja Greer

No 132, Working Papers from Bavarian Graduate Program in Economics (BGPE)

Abstract: This paper studies the impact of a dominant firm's conditional discounts on competitors' learning-by-doing. In a vertical context where a dominant upstream supplier and a competitive fringe sell their products to a single downstream firm, we analyze whether the dominant supplier prefers to offer a discount scheme, as in particular a quantity or market-share discount. In a dynamic setting with complete information and learning-by-doing, short-term market-share discounts and long-run contracts are more profitable to the dominant supplier than simple two-part tariffs or quantity discounts. We show that two-part tariffs as well as quantity discounts lead to more learning than market-share discounts, or long-term contracts. Thus, the dominant firm's contract choice restricts the competitive fringe's efficiency gain. Similar results occur for network effects.

Keywords: Market-share discounts; quantity discounts; learning-by-doing; dominant upstream supplier; competitive fringe. (search for similar items in EconPapers)
JEL-codes: L13 L42 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2013-02
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