All-Units Discounts as a Partial Foreclosure Device

41 Pages Posted: 10 Nov 2014 Last revised: 30 Jul 2019

See all articles by Yong Chao

Yong Chao

University of Louisville - College of Business - Department of Economics

Guofu Tan

University of Southern California - Department of Economics

Adam Chi Leung Wong

Lingnan University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 28, 2017

Abstract

All-units discounts (AUD) are pricing schemes that lower a buyer’s marginal price on every unit purchased when the buyer’s purchase exceeds or is equal to a pre-specified threshold. The AUD and related conditional rebates are commonly used in both final-goods and intermediate-goods markets. Although the existing literature has thus far focused on interpreting the AUD as a price discrimination tool, investment incentive program, or rent-shifting instrument, the antitrust concerns on the AUD and related conditional rebates are often their plausible exclusionary effects.

In this article, we investigate strategic effects of volume-threshold based AUD used by a dominant firm in the presence of a capacity-constrained rival. We find that the AUD always increase the dominant firm’s profits, sales volume and market share over linear pricing or two-part tariff. At the same time, the AUD adopted by a dominant firm lead to “partial foreclosure” of an equally or more efficient rival, in the sense that the rival’s profit, sales volume and market share are strictly reduced, as compared to linear pricing. The buyer’s surplus and total surplus could be either lower or higher under AUD, depending on the rival’s capacity level relative to the demand size.

The intuition for our findings is that, due to the limited capacity of the rival, the dominant firm, that has a “captive” portion of the buyer’s demand in the context of a single product, is able to use the AUD to leverage its market power on the “captive” to “competitive” portion of the demand, much like the tied-in selling strategy in the context of multiple products. Our analysis applies to other similar settings in which the dominant firm has some “captive” market when it offers “must-carry” brands or a wider range of products.

Keywords: all-units discounts, captive demand, partial foreclosure

JEL Classification: L13, L42

Suggested Citation

Chao, Yong and Tan, Guofu and Wong, Chi Leung, All-Units Discounts as a Partial Foreclosure Device (September 28, 2017). RAND Journal of Economics, Vol. 49, No. 1, 2018; USC-INET Research Paper No. 14-01. Available at SSRN: https://ssrn.com/abstract=2522181 or http://dx.doi.org/10.2139/ssrn.2522181

Yong Chao (Contact Author)

University of Louisville - College of Business - Department of Economics ( email )

Louisville, KY 40292
United States
(502)852-3573 (Phone)
(502)852-7672 (Fax)

HOME PAGE: http://yongchao.us

Guofu Tan

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States
213-740-3520 (Phone)

Chi Leung Wong

Lingnan University - Department of Economics ( email )

8 Castle Peak Road
Lingnan University
Hong Kong
Hong Kong

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