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http://ssrn.com/abstract=1937658
 
 

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Anti-Competitive Exclusion and Market Division Through Loyalty Discounts


Einer Elhauge


Harvard Law School

Abraham L. Wickelgren


University of Texas at Austin - School of Law; University of Texas at Austin - Center for Law, Business, and Economics

September 3, 2011

University of Texas Law, Law and Economics Research Paper No. 216

Abstract:     
We show that loyalty discounts create an externality among buyers even without economies of scale or downstream competition, and whether or not buyers make any commitment. Each buyer who signs a loyalty discount contract softens competition and raises prices for all buyers. We prove that, provided the entrant’s cost advantage is not too large, with enough buyers, this externality implies that in any equilibrium some buyers sign loyalty discount contracts, reducing total welfare. Moreover, if loyalty discounts require buyers to commit to buy only from the incumbent, there exists an equilibrium in which all buyers sign, foreclosing the rival entirely. As a result, the incumbent can use loyalty discounts to increase its profit and decrease both buyer and total welfare.

Number of Pages in PDF File: 55

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Date posted: October 3, 2011 ; Last revised: August 6, 2012

Suggested Citation

Elhauge, Einer and Wickelgren, Abraham L., Anti-Competitive Exclusion and Market Division Through Loyalty Discounts (September 3, 2011). University of Texas Law, Law and Economics Research Paper No. 216. Available at SSRN: http://ssrn.com/abstract=1937658 or http://dx.doi.org/10.2139/ssrn.1937658

Contact Information

Einer R. Elhauge
Harvard Law School ( email )
1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States
Abraham L. Wickelgren (Contact Author)
University of Texas at Austin - School of Law ( email )
727 East Dean Keeton Street
Austin, TX 78705
United States
University of Texas at Austin - Center for Law, Business, and Economics
Austin, TX 78712
United States
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