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Discussion Paper Details

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Title: Competition with exclusive contracts and market-share discounts

Author(s): Giacomo Calzolari and Vincenzo Denicolò

Publication Date: December 2009

Keyword(s): common agency, exclusionary contracts, market share discounts and price competition

Programme Area(s): Industrial Organization

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.

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Bibliographic Reference

Calzolari, G and Denicolò, V. 2009. 'Competition with exclusive contracts and market-share discounts'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7613