Promotional Allowances: Loss Leading as an Incentive Device

David Martimort and Jerome Pouyet

No 19474, CEPR Discussion Papers from Centre for Economic Policy Research

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.

JEL-codes: L42 L81 (search for similar items in EconPapers)
Date: 2024-09
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