Price-Cost Tests and Loyalty Discounts

30 Pages Posted: 21 May 2018  

Giacomo Calzolari

European University Institute - Economics Department (ECO); Centre for Economic Policy Research (CEPR); University of Bologna

Vincenzo Denicolò

University of Bologna

Multiple version iconThere are 2 versions of this paper

Date Written: May 6, 2018

Abstract

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

Calzolari, Giacomo and Denicolò, Vincenzo, Price-Cost Tests and Loyalty Discounts (May 6, 2018). Available at SSRN: https://ssrn.com/abstract=3173756 or http://dx.doi.org/10.2139/ssrn.3173756

Giacomo Calzolari (Contact Author)

European University Institute - Economics Department (ECO) ( email )

Villa la Fonte
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San Domenico di Fiesole, Florence 50014
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Centre for Economic Policy Research (CEPR) ( email )

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London, EC1V 3PZ
United Kingdom

University of Bologna ( email )

Piazza Scaravilli 2
I-40126 Bologna
Italy

HOME PAGE: http://sites.google.com/view/giacomo-calzolari

Vincenzo Denicolo

University of Bologna ( email )

Strada Maggiore 45
Bologna, 40125
Italy

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