Efficiency and Foreclosure Effects of Vertical Rebates: Empirical Evidence

Christopher T. Conlon and Julie Mortimer

Journal of Political Economy, 2021, vol. 129, issue 12, 3357 - 3404

Abstract: In many industries, upstream manufacturers pay downstream retailers for achieving quantity or market share targets. These “vertical rebates” may mitigate downstream moral hazard by inducing greater retail effort but may also incentivize retailers to drop competing products. We study these offsetting effects empirically for a rebate paid to one retailer. Using a field experiment, we exogenously vary the outcome of retailer effort. We estimate models of consumer choice and retailer behavior to quantify the rebate’s effect on retail assortment and effort. We find that the rebate is designed to exclude a competing product and fails to maximize social surplus.

Date: 2021
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Related works:
Working Paper: Efficiency and Foreclosure Effects of Vertical Rebates: Empirical Evidence (2017)
Working Paper: Efficiency and Foreclosure Effects of Vertical Rebates: Empirical Evidence (2013)
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