Asymmetry in Capacity and the Adoption of All-Units Discounts

29 Pages Posted: 8 Aug 2018 Last revised: 31 Jul 2019

See all articles by Yong Chao

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

Date Written: December 10, 2018

Abstract

In many recent abuse of dominance antitrust cases, the dominant supplier adopts pricing schemes involving conditional rebates, whereas its smaller competitors often use simple linear pricing. We provide a game-theoretic justification for the observed asymmetry in pricing practices by studying a model in which a supplier with full capacity faces a capacity-constrained rival. The asymmetry in capacity between the suppliers (or more generally be interpreted as factors such as distribution channels or ability to access to buyers), which gives rise to the “non-contestable” market, allows the dominant supplier to take advantage of the quantity commitment through all-units discounts while the capacity-constrained rival is induced to offer simple linear pricing.

Keywords: linear pricing, all-units discounts, capacity constraint, captive demand

JEL Classification: D43, L13, L42

Suggested Citation

Chao, Yong and Tan, Guofu and Wong, Chi Leung, Asymmetry in Capacity and the Adoption of All-Units Discounts (December 10, 2018). International Journal of Industrial Organization, Vol. 65, 2019. Available at SSRN: https://ssrn.com/abstract=3217438 or http://dx.doi.org/10.2139/ssrn.3217438

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

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 (Contact Author)

Lingnan University - Department of Economics ( email )

8 Castle Peak Road
Lingnan University
Hong Kong
Hong Kong

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