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
JEL(s): D43, L14
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.