All-Units Discounts in Retail Contracts |
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Authors: | Sreya Kolay Greg Shaffer Janusz A. Ordover |
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Affiliation: | Department of Economics University of Rochester; Simon School of Business University of Rochester; Department of Economics New York University |
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Abstract: | All-units discounts in retail contracts refer to discounts that lower a retailer's wholesale price on every unit purchased when the retailer's purchases equal or exceed some quantity threshold. These discounts pose a challenge to economic theory because it is difficult to understand why a manufacturer ever would charge less for a larger order if its intentions were benign. In this paper, we show that all-units discounts may profitably arise absent any exclusionary motive. All-units discounts eliminate double marginalization in a complete information setting, and they extract more profit than would a menu of two-part tariffs in the standard incomplete information setting with two types of buyers. All-units discounts may improve or may reduce welfare (relative to menus of two-part tariffs) depending on demand parameters . |
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