Loyalty discounts

Ioana Chioveanu and Ugur Akgun ()
Additional contact information
Ugur Akgun: Charles Rivers Associates

Working Papers. Serie AD from Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie)

Abstract: This paper considers the use of loyalty inducing discounts in vertical supply chains. An upstream manufacturer and a competitive fringe sell differentiated products to a retailer who has private information about the level of stochastic demand. We provide an analysis of the market outcomes when the manufacturer uses two-part tariffs (2PT), all-unit discounts (AU) and market share discounts (MS). We show that retailer’s risk attitude affects manufacturer’s preferences over these three pricing schemes. When the retailer is risk-neutral, it bears all the risk and all three schemes lead to the same outcome. When the retailer is risk-averse, 2PT performs the worst from manufacturer’s perspective but it leads to the highest total surplus. For a wide range of parameter values (but not for all) the manufacturer prefers MS to AU. By limiting retailer’s product substitution possibilities MS makes the demand for manufacturer’s product more inelastic. This reduces the amount (share of profits) the manufacturer needs to leave to the retailer for the latter to participate in the scheme.

Keywords: vertical contracts; loyalty discounts; private information; market share discounts. (search for similar items in EconPapers)
JEL-codes: J12 J13 J42 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2011-02
New Economics Papers: this item is included in nep-agr, nep-com, nep-cta and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published by Ivie

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http://www.ivie.es/downloads/docs/wpasad/wpasad-2011-03.pdf Fisrt version / Primera version, 2011 (application/pdf)

Related works:
Journal Article: Loyalty Discounts (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ivi:wpasad:2011-03

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