All-Units Discounts As a Partial Foreclosure Device

41 Pages Posted: 25 Sep 2016 Last revised: 30 Sep 2017

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 26, 2017

Abstract

We investigate the strategic effects of all-units discounts (AUDs) used by a dominant firm in the presence of a capacity-constrained rival. Due to the limited capacity of the rival, the dominant firm has a captive portion of the buyer’s demand for the single product. As compared to linear pricing, the dominant firm can use AUDs to go beyond its captive portion by tying its captive demand with part of the competitive demand and partially foreclose its small rival. When the rival’s capacity level is well below relevant demand, AUDs reduce the buyer’s surplus.

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

JEL Classification: L13, L42

Suggested Citation

Chao, Yong and Tan, Guofu and Wong, Adam Chi Leung, All-Units Discounts As a Partial Foreclosure Device (September 26, 2017). RAND Journal of Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2842600 or http://dx.doi.org/10.2139/ssrn.2842600

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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