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

David Martimort and Jerome Pouyet

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Abstract: A retailer may boost demand for a manufacturer's product through unobservable promotional efforts. Fixed fees cannot be used to freely allocate profit within the vertical structure. When manufacturers have market power, the equilibrium wholesale contract features a retail price below cost together with a rebate for incremental units bought by the retailer when effort has succeeded in boosting sales. Loss leading emerges as an incentive device in such an incomplete contracting scenario. A ban on below-cost pricing leads to a higher retail price and a lower promotional effort.

Keywords: promotional allowances; moral hazard; loss leading; performance-based allowances; below-cost pricing (search for similar items in EconPapers)
Date: 2026-02-18
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Working Paper: The Incentive Virtues of Performance-Based Trade Allowances and Loss Leading (2026)
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