Price-Cost Tests and Loyalty Discounts
30 Pages Posted: 21 May 2018
Date Written: May 6, 2018
We analyze, by means of a formal economic model, the use of price-cost tests to assess the competitive effects of loyalty discounts. In the model, a dominant firm enjoys a competitive advantage over its rivals and uses loyalty discounts as a means to boost the demand for its product. We show that in this framework price-cost tests are misleading or, at best, completely uninformative. Our results cast doubts on the applicability of price-tests to loyalty discount cases.
Keywords: Loyalty discounts, As-efficient competitor, Price-cost tests, Sacrifice of profit, Contestable share
JEL Classification: D42, D82, L42
Suggested Citation: Suggested Citation