Working Paper: CEPR ID: DP12924
Authors: Giacomo Calzolari; Vincenzo Denicol
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 Codes: D42; D82; L42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Loyalty Discounts (L42) | Demand (R22) |
| Loyalty Discounts (L42) | Price-Cost Tests Results (L11) |
| Dominant Firm's Competitive Advantage (L21) | Loyalty Discounts Anticompetitive Effects (L42) |
| Loyalty Discounts Anticompetitive Effects (L42) | Price-Cost Tests Misleading Results (L11) |
| Loyalty Discounts Procompetitive Effects (L42) | Price-Cost Tests Results (L11) |