Working Paper: NBER ID: w19709
Authors: Christopher T. Conlon; Julie Holland Mortimer
Abstract: Vertical rebates are prominently used across a wide range of industries. These con- tracts may induce greater retail effort, but may also prompt retailers to drop competing products. We study these offsetting efficiency and foreclosure effects empirically, using data from one retailer. Using a field experiment, we show how the rebate allocates the cost of effort between manufacturer and retailer. We estimate structural models of demand and retailer behavior to quantify the rebate's effect on assortment and retailer effort. We find that the rebate increases industry profitability and consumer utility, but fails to maximize social surplus and leads to upstream foreclosure.
Keywords: Vertical Rebates; Foreclosure Effects; Retailer Behavior; Field Experiment; Market Dynamics
JEL Codes: L00; L14; L42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased retailer effort (L81) | improved stocking decisions (Q22) |
| all-units discount (AUD) (L42) | increased industry profitability (L19) |
| all-units discount (AUD) (L42) | increased consumer utility (D11) |
| increased retailer effort (L81) | reduced product variety (L15) |
| all-units discount (AUD) (L42) | increased retailer effort (L81) |
| all-units discount (AUD) (L42) | shift in allocation of stockout costs (D61) |
| all-units discount (AUD) (L42) | upstream foreclosure (G33) |