Working Paper: CEPR ID: DP7613
Authors: Giacomo Calzolari; Vincenzo Denicolo
Abstract: We study the effects of exclusive contracts and market-share discounts (i.e., discounts conditioned on the share a firm receives of the customer?s total purchases) in an adverse selection model where firms supply differentiated products and compete in non-linear prices. We show that exclusive contracts intensify the competition among the firms, increasing consumer surplus, improving efficiency, and reducing profits. Firms would gain if these contracts were prohibited, but are caught in a prisoner?s dilemma if they are permitted. In this latter case, allowing firms to offer also market-share discounts unambiguously weakens competition, reducing efficiency and harming consumers. However, starting from a situation where exclusive contracts are prohibited, the effect of market-share discounts (which include exclusive contracts as a limiting case) is ambiguous.
Keywords: Common agency; Exclusionary contracts; Market share discounts; Price competition
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 |
|---|---|
| Exclusive contracts (L14) | intensify competition (L13) |
| intensify competition (L13) | increase in consumer surplus (D11) |
| intensify competition (L13) | reduce profits (D33) |
| Market share discounts (L42) | weaken competition (L49) |
| weaken competition (L49) | harm consumers (D18) |
| Market share discounts (L42) | ambiguous effects on competition when exclusive contracts are prohibited (L49) |
| Permitting both exclusive contracts and market share discounts (L42) | ambiguous overall effect (D91) |
| Prohibiting both exclusive contracts and market share discounts (L42) | more competitive than allowing both (L49) |