The Incentive Virtues of Performance-Based Trade Allowances and Loss Leading

Jérôme Pouyet and David Martimort
Additional contact information
Jérôme Pouyet: CY - CY Cergy Paris Université, CNRS - Centre National de la Recherche Scientifique, ESSEC Business School and THEMA (UMR 8184) - ESSEC Business School - THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université
David Martimort: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse, CNRS - Centre National de la Recherche Scientifique

Post-Print from HAL

Abstract: A retailer can boost demand for a manufacturer's product through non-verifiable activities. Performance-based trade allowances—rebates conditional on the retailer's successful sales efforts—help mitigate this moral hazard problem. In equilibrium, the wholesale contract includes a retail price set below cost, complemented by a rebate for incremental units purchased when efforts successfully increase sales. Loss leading thus emerges as an incentive mechanism, rather than a practice driven by anti-competitive or exploitative intent. A ban on below-cost pricing leads to higher retail prices and reduced promotional efforts.

Keywords: Vertical restraints; Moral hazard; Loss leading; Performance-based allowances; Below-cost pricing (search for similar items in EconPapers)
Date: 2026-06
Note: View the original document on HAL open archive server: https://hal.science/hal-05740397v1
References: Add references at CitEc
Citations:

Published in Journal of Industrial Economics, In press

Downloads: (external link)
https://hal.science/hal-05740397v1/document (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05740397

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().