DP12924 Price-cost tests and loyalty discounts

Author(s): Giacomo Calzolari, Vincenzo Denicolò
Publication Date: May 2018
Keyword(s): As-efficient competitor, Contestable share, Loyalty discounts, Price-cost tests, Sacrifice of profit
JEL(s): D42, D82, L42
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12924

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.