How Loyalty Discounts Can Perversely Discourage Discounting: Comment

Abstract:     
In his recent paper entitled “How Loyalty Discounts Can Perversely Discourage Discounting,” Professor Einer Elhauge argues that exclusive contracts with loyalty discounts offered by a single incumbent seller can create anticompetitive effects in a broad range of settings. In this comment we show that the anticompetitive effect identified by Professor Elhauge stems from the most-favored-nation feature assumed in Elhauge’s model rather from loyalty discounts. Indeed, the qualitative effects in Professor Elhauge’s model are unchanged even when the loyalty discount is not present. Moreover, Professor Elhauge’s results are not robust and depend on a number of restrictive assumptions. In particular, there are no anticompetitive effects when competition, either between incumbent sellers or between entrants, is introduced.

Number of Pages in PDF File: 9

Keywords: Loyalty Discounts, Fidelity Rebates, Conditional Discounts, Market-Share Discounts, Naked Exclusion

JEL Classification: C72, K21, L12, L40, L41, L42

Accepted Paper Series