All-units discounts in retail contracts

Sreya Kolay, Greg Shaffer, Janusz A. Ordover

Research output: Contribution to journalArticle

47 Citations (Scopus)

Abstract

All-units discounts in retail contracts refer to discounts that lower a retailer's wholesale price on every unit purchased when the retailer's purchases equal or exceed some quantity threshold. These discounts pose a challenge to economic theory because it is difficult to understand why a manufacturer ever would charge less for a larger order if its intentions were benign. In this paper, we show that all-units discounts may profitably arise absent any exclusionary motive. All-units discounts eliminate double marginalization in a complete information setting, and they extract more profit than would a menu of two-part tariffs in the standard incomplete information setting with two types of buyers. All-units discounts may improve or may reduce welfare (relative to menus of two-part tariffs) depending on demand parameters.
Original languageEnglish
Pages (from-to)429-459
Number of pages31
JournalJournal of Economics and Management Strategy
Volume13
Issue number3
Early online date21 Jul 2004
DOIs
Publication statusPublished - Sep 2004

Cite this