All-units discounts and double moral hazard

Daniel P. O'Brien

Journal of Economic Theory, 2017, vol. 170, issue C, 1-28

Abstract: An all-units discount is a price reduction applied to all units purchased if the customer's total purchases equal or exceed a given quantity threshold. Since the discount is paid on all units rather than marginal units, the tariff is discontinuous and exhibits a negative marginal price (“cliff”) at the threshold that triggers the discount. This paper shows that all-units discounts arise in optimal agency contracts between upstream and downstream firms that face double moral hazard. I present conditions under which all-units discounts dominate two-part tariffs and other continuous tariffs. I also examine these tariffs when the upstream market faces a threat of entry. In the case considered, all-units discounts deter entry by less efficient rivals without distorting price and investment, whereas continuous tariffs either accommodate such entry or deter it by distorting price and investment.

Keywords: All-units discounts; Retroactive rebates; Double marginalization; Double moral hazard; Partnerships; Teams (search for similar items in EconPapers)
JEL-codes: D42 D86 L12 L42 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:170:y:2017:i:c:p:1-28

DOI: 10.1016/j.jet.2017.02.001

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