Working Paper: CEPR ID: DP17314
Authors: Roman Inderst; Fabian Griem; Greg Schaffer
Abstract: In a model of contractual inefficiencies due to double-marginalization, we analyze the practice of tied rebates that incentivizes retailers to purchase multiple products from the same manufacturer. We isolate two opposing effects: a surplus-sharing effect that enhances efficiency and a rent-extraction effect that reduces efficiency. The overall effect is more likely to be negative when the manufacturer has a particularly strong brand for which the retailers alternatives are much inferior. Foreclosure of a more efficient provider of the manufacturers weaker product is not a sufficient condition for a welfare loss. Our key positive implication relates to the seemingly inefficient introduction of weaker products by the owners of particularly strong brands.
Keywords: contractual inefficiencies; double marginalization; competition; surplus-sharing effect; rent-extraction effect; efficiency; brand strength
JEL Codes: L14; D43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tied rebates (L42) | enhance contractual efficiency (D86) |
| surplus-sharing effect (E25) | increase overall industry profits (L21) |
| strong manufacturer brand (L68) | increase rent extraction (R21) |
| rent extraction (H13) | negative impact on welfare (I30) |
| strong manufacturer brand (L68) | higher probability of negative overall effects (D91) |
| surplus-sharing effect (E25) | welfare loss (D69) |
| strong brand tied to weaker product (L15) | welfare loss (D69) |
| tied rebates (L42) | negative overall effects (D62) |