Promotional Allowances: Loss Leading as an Incentive Device

David Martimort and Jerome Pouyet

Working Papers from HAL

Abstract: A retailer can boost demand for a manufacturer's product through unobservable activities. Promotional allowances, which are retrospective rebates tied to the success of the retailer's promotional efforts, can partially mitigate the resulting moral hazard problem. In equilibrium, the wholesale contract includes a retail price set below cost, complemented by a rebate for incremental units purchased when promotional efforts successfully increase sales. Loss leading thus emerges as an incentive mechanism, rather than a practice driven by anti-competitive or exploitative intent. A ban on below-cost pricing leads to higher retail prices and reduced promotional efforts.

Keywords: Moral Hazard; Vertical restraints; Loss leading; Promotional allowances; Below-cost pricing (search for similar items in EconPapers)
Date: 2024
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Working Paper: Promotional Allowances: Loss Leading as an Incentive Device (2024)
Working Paper: Promotional Allowances: Loss Leading as an Incentive Device (2024)
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