All-Unit Discounts and the Problem of Surplus Division
19 Pages Posted: 16 Dec 2007 Last revised: 20 Feb 2010
Date Written: February 15, 2010
Competition authorities often challenge all-unit discounts due to the high pressure they impose upon buyers to meet the quantity threshold. We analyze this so called suction effect in a sequential-entry model where an incumbent seller seeks to shift rents from a more efficient entrant. We find that, in contrast to other rent-seeking mechanisms such as exclusive dealing contracts which are usually seen as being very similar, all-unit discounts do not fully allow the incumbent seller to disentangle the implementation of the desired quantity from the surplus division with a buyer. We show that this leads to inefficiencies if and only if the buyer has a high outside option which is the case when competition between potential entrants is high, and we argue that this source of inefficiencies is typical for all-unit discounts.
Keywords: Discounts, Abuse of Market Dominance, Foreclosure, Rent Shifting, Exclusive Dealing.
JEL Classification: D86, K21, L42
Suggested Citation: Suggested Citation