Promotional allowances

Teis Lunde Lømo () and Simen Ulsaker
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Teis Lunde Lømo: Department of Economics, University of Bergen, Postal: P.O.Box 7800, 5020 Bergen, Norway, http://www.uib.no/en/persons/Teis.Lunde.L%C3%B8mo

No 08/16, Working Papers in Economics from University of Bergen, Department of Economics

Abstract: We study a setting of repeated trade between an upstream manufacturer and two downstream retailers that can exert valuable but noncontractible sales effort. Our focus is the manufacturer’s use of relational contracts with discretionary promotional allowances – payments that reward retailers for effort provision. We show that such contracts enable a sufficiently patient manufacturer to, in equilibrium, provide retailers with the correct incentives and extract the maximal industry profit in every period, and that this outcome cannot be replicated with formal two-part tariffs. These results have implications for the policy treatment of lump-sum payments from manufacturers to retailers, as well as for resale price maintenance.

Keywords: Vertical restraints; Retail services; Repeated games; Relational contracts; Competition policy (search for similar items in EconPapers)
JEL-codes: C73 L14 L42 L81 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2016-10-07
New Economics Papers: this item is included in nep-com, nep-cta and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:bergec:2016_008

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