Competition with Exclusive Contracts and Market-Share Discounts

50 Pages Posted: 11 Jan 2010  

Giacomo Calzolari

University of Bologna

Vincenzo Denicolò

University of Bologna

Multiple version iconThere are 2 versions of this paper

Date Written: December 2009

Abstract

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.

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

JEL Classification: D42, D82, L42

Suggested Citation

Calzolari, Giacomo and Denicolò, Vincenzo, Competition with Exclusive Contracts and Market-Share Discounts (December 2009). CEPR Discussion Paper No. DP7613. Available at SSRN: https://ssrn.com/abstract=1533217

Giacomo Calzolari (Contact Author)

University of Bologna ( email )

Piazza Scaravilli 2
I-40126 Bologna
Italy
0039 051 2098489 (Phone)
0039 051 2098493 (Fax)

HOME PAGE: http://www2.dse.unibo.it/calzolari/

Vincenzo Denicolo

University of Bologna ( email )

Strada Maggiore 45
Bologna, 40125
Italy

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