Loyalty discounts and price-cost tests |
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| Affiliation: | 1. European University Institute and CEPR, Department of Economics, Via Fontanelle 18, 50014, Fiesole, Italy;2. University of Bologna and CEPR, Department of Economics, Piazza Scaravilli 2, 40126, Bologna, Italy;1. Toulouse School of Economics, Esplanade de l’Université 1, Toulouse 31080, France;3. Department of Economics and Business, University of Catania, C.so Italia 55, Catania 95129, Italy;4. Department of Economics and Related Studies, University of York, Heslington, York YO10 5DD, UK;5. Department of Economics/NIPE, University of Minho, Campus de Gualtar, Braga 4710-057, Portugal;6. Department of Economics, University of Bergen, Norway;1. Department of Economics, University of Illinois, Urbana-Champaign, United States;2. Department of Economics, University of St. Gallen, Switzerland;1. Department of Economics, University of Kentucky, Lexington, KY 4506, USA;2. Jönköping University Business School, Jönköping, Sweden;1. College of Business, University of Louisville, 2301 S. 3rd Street, Louisville, KY 40292, United States;2. Department of Economics, University of Southern California, 3620 S. Vermont Avenue, Los Angeles, CA 90089, United States;3. Department of Economics, Lingnan University, 8 Castle Peak Road, Tuen Mun, Hong Kong |
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| Abstract: | We analyze, by means of a formal economic model, the use of the discount-attribution test to assess the competitive effects of loyalty discounts. (The discount-attribution test is a variant of the price-cost test, where the discount is attributed only to the share of total demand that is regarded as effectively contestable.) In the model, a dominant firm enjoys a competitive advantage over its rivals and uses market-share discounts to boost the demand for its own products. In this framework, we show that the attribution test is misleading or, at best, completely uninformative. Our results cast doubts on the applicability of price-cost tests to loyalty discount cases. |
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