All-Units Discounts: Leverage and Partial Foreclosure in Single-Product Markets

Abstract

We present an exclusionary theory of all-units discounts schemes. These schemes offer a per-unit discount to all units purchased if the customer’s purchase reaches a pre-specified quantity threshold. We demonstrate that when a dominant firm competes with a capacity-constrained rival, it is possible for the dominant firm to use all-units discounts to leverage its market power in the non-contestable portion to influence the contestable portion of the demand in single-product markets and to partially foreclose the small rival. Our theory suggests that pricing below cost is not necessary for all-units discounts schemes to be exclusionary and that a standard price-cost test may not be useful in assessing the exclusionary effects of all-units discounts. We advocate a rule of reason approach based on a comprehensive analysis of market structure, the nature of discount programs, exclusionary effects, efficiency, and the welfare consequences of these practices.

Keywords: All-units Discounts, Leverage, Partial Foreclosure