DP17314 Tying under Double-Marginalization
|Author(s):||Fabian Griem, Roman Inderst, Greg Schaffer|
|Publication Date:||May 2022|
|Keyword(s):||brand strength, Competition, contractual inefficiencies, Double-marginalization, efficiency, rent-extraction effect, surplus-sharing effect|
|Programme Areas:||Industrial Organization, Organizational Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=17314|
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.