DP8144 Competitive quantity discounts

Author(s): Giacomo Calzolari, Vincenzo Denicolò
Publication Date: December 2010
Keyword(s): Dominant firm, Exclusion, Non linear pricing, Quantity discounts
JEL(s): D42, D82, L42
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8144

We analyze the effects of competition with quantity discounts in a duopoly model with asymmetric firms. Consumers are privately informed about demand, so firms use quantity discounts as a price discrimination device. However, a dominant firm may also use quantity discounts to weaken or eliminate its competitor. We analyze the effects of quantity discounts on firms' profits and consumer surplus. Our main finding is that quantity discounts can decrease social welfare (i.e., the sum of producers' and consumers' surplus) for a small set of parameter values.