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

David Martimort and Jerome Pouyet

No 24-1564, TSE Working Papers from Toulouse School of Economics (TSE)

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: Vertical restraints; loss leading; promotional allowances; below-cost; pricing (search for similar items in EconPapers)
JEL-codes: L11 L42 L81 (search for similar items in EconPapers)
Date: 2024-09-04, Revised 2026-02
New Economics Papers: this item is included in nep-com, nep-cta, nep-ind, nep-mic and nep-reg
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Working Paper: The Incentive Virtues of Performance-Based Trade Allowances and Loss Leading (2026)
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:129692

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