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Efficiency and foreclosure effects of all-units discounts : empirical evidence

Author: Christopher T Conlon; Julie Holland Mortimer; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2013.
Series: Working paper series (National Bureau of Economic Research), no. 19709.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Database:WorldCat
Summary:
We study an All-Units Discount, in which a downstream firm pays a linear wholesale price up to a quantity threshold, beyond which a discount applies to all future and previous units. The result of the contract is that marginal cost downstream is effectively negative over a quantity range. Such contracts are common in many industries, and we implement a field experiment in one such industry (confections), in which we  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Christopher T Conlon; Julie Holland Mortimer; National Bureau of Economic Research.
OCLC Number: 869822602
Notes: "December 2013."
Description: 1 online resource (46 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 19709.
Other Titles: All-units discounts :
Responsibility: Christopher T. Conlon, Julie Holland Mortimer.

Abstract:

We study an All-Units Discount, in which a downstream firm pays a linear wholesale price up to a quantity threshold, beyond which a discount applies to all future and previous units. The result of the contract is that marginal cost downstream is effectively negative over a quantity range. Such contracts are common in many industries, and we implement a field experiment in one such industry (confections), in which we remove top-selling products from a market in order to identify the potential efficiency effect of the contract. We combine the experimental variation with a structural model of demand and a dynamic model of the retailer's re-stocking decision to identify cases in which the contract results in either efficient or inefficient exclusion of competing products. We show how the contract allocates the cost of a stock-out between upstream and downstream firms, and find evidence of inefficient exclusion. Finally, we point out that the impact of upstream mergers in these markets is likely to be felt not through the price in the final-goods market, but rather in the wholesale market. We examine the impact of various upstream mergers on the willingness of the dominant firm to offer rebate contracts, and the impact that the rebate contracts have on social welfare.

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