Anti-Competitive Exclusion and Market Division Through Loyalty Discounts

55 Pages Posted: 3 Oct 2011 Last revised: 6 Aug 2012

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

Date Written: September 3, 2011

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.

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: https://ssrn.com/abstract=1937658 or http://dx.doi.org/10.2139/ssrn.1937658

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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