Inducing Downstream Selling Effort with Market Share Discounts

34 Pages Posted: 25 Sep 2009 Last revised: 14 Jul 2011

See all articles by David E. Mills

David E. Mills

University of Virginia - Department of Economics

Date Written: September 2, 2009

Abstract

Loyalty discounts and rebates are pricing schemes that offer incentives to buyers for reaching or exceeding certain sales thresholds. In the case of market share discounts, thresholds are expressed as a percentage of the buyer’s total purchase requirements. Although market share discounts may have exclusionary effects under certain circumstances when a seller has significant market power, there are plausible non-exclusionary reasons for offering them as well. Two such reasons – rent extraction and inducing downstream selling effort – are explored in this paper. The paper considers the case of a manufacturer who sells a differentiated good through a network of heterogeneous, non-exclusive retailers. The manufacturer offers market share discounts to induce non-contractible selling effort such as brand-specific information or customer service from those retailers who possess certain unobservable characteristics. In some instances, market share discounts induce increased selling effort and improve market performance as compared to linear pricing. In other instances, they have no effect on aggregate benefits, but merely shift the rents created by induced selling effort upstream to the manufacturer. In no instance, as long as the producers of substitute goods retain sufficient sales to remain viable, do market share discounts impair market performance.

Keywords: Market Share Discounts, Loyalty Discounts, Exclusionary Behavior, Procompetitive Effects

JEL Classification: L11, L41

Suggested Citation

Mills, David E., Inducing Downstream Selling Effort with Market Share Discounts (September 2, 2009). International Journal of the Economics of Business, Vol. 17, No. 2, 2010. Available at SSRN: https://ssrn.com/abstract=1478692

David E. Mills (Contact Author)

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States

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