Download this Paper Open PDF in Browser

Anticompetitive Market Division through Loyalty Discounts without Buyer Commitment

29 Pages Posted: 7 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: August 1, 2012

Abstract

We show that loyalty discounts without buyer commitment create an externality among buyers because each buyer who signs a loyalty discount contract softens competition and raises prices for all buyers. This externality can enable an incumbent to use loyalty discounts to effectively divide the market with its rival and raise prices. 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, segmenting the market and reducing consumer welfare and total welfare. These propositions are true even if the buyers coordinate, the entrant is more efficient, the loyalty discounts cover less than half the market, and all the loyalty discounts are above cost. We also prove that these propositions hold even if we assume no economies of scale, no downstream competition, no buyer switching costs, no financial constraints, no limits on rival expandability, and no intraproduct bundle of contestable and incontestable demand.

JEL Classification: C72, K0, K21, L12, L40, L41, L42

Suggested Citation

Elhauge, Einer and Wickelgren, Abraham L., Anticompetitive Market Division through Loyalty Discounts without Buyer Commitment (August 1, 2012). Harvard Discussion Paper No. 723; U of Texas Law, Law and Econ Research Paper No. 239. Available at SSRN: https://ssrn.com/abstract=2125428 or http://dx.doi.org/10.2139/ssrn.2125428

Einer Elhauge (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

Abraham Wickelgren

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

Paper statistics

Downloads
247
Rank
105,356
Abstract Views
1,665