Asymmetry in Capacity and the Adoption of All-Units Discounts

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