Market-Share Contracts with Asymmetric Information
CCP Working Paper No. 07-17
29 Pages Posted: 12 Sep 2007
Date Written: July 2007
In this paper, a dominant supplier and competitive fringe supply goods to a common buyer who has private information about the state of demand. We give conditions under which market-share contracts are profitable, and we show that, in some cases, the full-information outcome can be obtained (unlike in standard screening models, where the agents earns an information rent in the high state and demand is distorted in the low state). Our results also inform the antitrust debate on bundling, fidelity rebates and all-units discounts. We provide a new motive for a dominant firm to bundle its own product with a competitively supplied product (with ambiguous consequences for welfare), and we show that the market-share contracts, which are a subset of fidelity rebates, are more profitable than all-units discounts.
Keywords: Adverse selection, screening, bundling, fidelity rebates, all-units discounts
JEL Classification: L13, L41, L42
Suggested Citation: Suggested Citation