Market-share contracts with asymmetric information

Adrian Majumdar, Greg Shaffer

Research output: Contribution to journalArticlepeer-review

28 Citations (Scopus)

Abstract

In this paper, a dominant firm and competitive fringe supply substitute goods to a retailer who has private information about demand. We show that it is profitable for the dominant firm to condition payment on how much the retailer buys from the fringe (market-share contracts). The dominant firm thereby creates countervailing incentives for the retailer and, in some cases, is able to obtain the full-information outcome (unlike in standard screening models, where the agent earns an information rent in the high-demand state and output is distorted in the low-demand state). Our results have implications for fidelity rebates, all-units discounts, and competition policy. Although some crowding out of the fringe may occur when demand is low, we show that market-share contracts need not be harmful for welfare.
Original languageEnglish
Pages (from-to)393-421
Number of pages29
JournalJournal of Economics & Management Strategy
Volume18
Issue number2
DOIs
Publication statusPublished - 2009

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