Market‐Share Contracts with Asymmetric Information

Adrian Majumdar and Greg Shaffer

Journal of Economics & Management Strategy, 2009, vol. 18, issue 2, 393-421

Abstract: In this paper, a dominant firm and competitive fringe supply substitute goods to a retailer who has private information about demand. We show that it is profitable for the dominant firm to condition payment on how much the retailer buys from the fringe (market‐share contracts). The dominant firm thereby creates countervailing incentives for the retailer and, in some cases, is able to obtain the full‐information outcome (unlike in standard screening models, where the agent earns an information rent in the high‐demand state and output is distorted in the low‐demand state). Our results have implications for fidelity rebates, all‐units discounts, and competition policy. Although some crowding out of the fringe may occur when demand is low, we show that market‐share contracts need not be harmful for welfare.

Date: 2009
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https://doi.org/10.1111/j.1530-9134.2009.00218.x

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