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Competition with Exclusive Contracts and Market-Share Discounts

Vincenzo Denicolò

University of Bologna

Giacomo Calzolari

University of Bologna

December 11, 2009

We study the effects of exclusive contracts and market-share discounts (i.e., discounts conditioned on the share a firm receives of the customer's total purchases) in an adverse selection model where firms supply differentiated products and compete in non-linear prices. We show that exclusive contracts intensify the competition among the firms, increasing consumer surplus, improving efficiency, and reducing profits. Firms would gain if these contracts were prohibited, but are caught in a prisoner's dilemma if they are permitted. In this latter case, allowing firms to offer also market-share discounts unambiguously weakens competition, reducing efficiency and harming consumers. However, starting from a situation where exclusive contracts are prohibited, the effect of market-share discounts (which include exclusive contracts as a limiting case) is ambiguous.

Number of Pages in PDF File: 48

Keywords: exclusionary contracts, market share discounts, price competition, common agency

JEL Classification: D42, L42, D82

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Date posted: December 14, 2009 ; Last revised: December 18, 2009

Suggested Citation

Denicolò, Vincenzo and Calzolari, Giacomo, Competition with Exclusive Contracts and Market-Share Discounts (December 11, 2009). Available at SSRN: http://ssrn.com/abstract=1522195 or http://dx.doi.org/10.2139/ssrn.1522195

Contact Information

Vincenzo Denicolo
University of Bologna ( email )
Strada Maggiore 45
Bologna, 40125
Giacomo Calzolari (Contact Author)
University of Bologna ( email )
Piazza Scaravilli 2
I-40126 Bologna
0039 051 2098489 (Phone)
0039 051 2098493 (Fax)
HOME PAGE: http://www2.dse.unibo.it/calzolari/
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