Quantity Discounts from Risk Averse Sellers

FTC Bureau of Economics Working Paper No. 276

29 Pages Posted: 4 May 2005

See all articles by Patrick DeGraba

Patrick DeGraba

Federal Trade Commission - Antitrust I

Date Written: April 2005

Abstract

It is widely believed that larger customers in a market can secure lower prices than smaller customers. This paper presents conditions under which risk averse sellers, who can distinguish larger customers from smaller customers, but who cannot observe customers' valuations, have an incentive to offer lower prices to larger customers. The intuition is that a single customer that demands a specific quantity represents a riskier profit source than multiple customers with independent valuations whose demands sum to that same quantity. Sellers respond to the riskier profit source by offering a lower price to reduce some of the risk.

The paper suggests the existence of a "pure customer size effect" that would always create an incentive for sellers to offer larger customers lower prices. It also suggests two other effects, one due to a change in the size of the market and the other based on the mix of large and small customers. These effects may either reinforce or counteract the pure customer size effect, depending on the nature of the seller's utility function.

Keywords: Quantity Discounts, Risk Aversion, Large Customer Discounts

JEL Classification: D21, D43

Suggested Citation

DeGraba, Patrick, Quantity Discounts from Risk Averse Sellers (April 2005). FTC Bureau of Economics Working Paper No. 276. Available at SSRN: https://ssrn.com/abstract=712081 or http://dx.doi.org/10.2139/ssrn.712081

Patrick DeGraba (Contact Author)

Federal Trade Commission - Antitrust I ( email )

600 Pennsylvania Avenue, NW
Rm. 4249
Washington, DC 20580
United States
202-326-2855 (Phone)
202-326-3443 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
123
Abstract Views
872
rank
236,048
PlumX Metrics