Tying under Double-Marginalization

Roman Inderst, Fabian Griem and Greg Schaffer

No 17314, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In a model of contractual inefficiencies due to double-marginalization, we analyze the practice of tied rebates that incentivizes retailers to purchase multiple products from the same manufacturer. We isolate two opposing effects: a surplus-sharing effect that enhances efficiency and a rent-extraction effect that reduces efficiency. The overall effect is more likely to be negative when the manufacturer has a particularly strong brand for which the retailers alternatives are much inferior. Foreclosure of a more efficient provider of the manufacturers weaker product is not a sufficient condition for a welfare loss. Our key positive implication relates to the seemingly inefficient introduction of weaker products by the owners of particularly strong brands.

Keywords: Contractual inefficiencies; Double-marginalization; Competition; Surplus-sharing effect; Rent-extraction effect; Efficiency; Brand strength (search for similar items in EconPapers)
JEL-codes: D43 L14 (search for similar items in EconPapers)
Date: 2022-05
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