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

Canadian Competition Law Review (Spring 2017 Forthcoming)

25 Pages Posted: 2 Apr 2017 Last revised: 7 Apr 2017

Yong Chao

University of Louisville - College of Business - Department of Economics

Guofu Tan

University of Southern California - Department of Economics

Date Written: March 31, 2017

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

Suggested Citation

Chao, Yong and Tan, Guofu, All-Units Discounts: Leverage and Partial Foreclosure in Single-Product Markets (March 31, 2017). Canadian Competition Law Review (Spring 2017 Forthcoming). Available at SSRN: https://ssrn.com/abstract=2944415

Yong Chao

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 (Contact Author)

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)

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