Market-Share Contracts with Asymmetric Information

29 Pages Posted: 5 May 2009

See all articles by Adrian N. Majumdar

Adrian N. Majumdar

RBB Economics

Greg Shaffer

University of Rochester - Simon Business School

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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.

Suggested Citation

Majumdar, Adrian N. and Shaffer, Greg, Market-Share Contracts with Asymmetric Information. Journal of Economics & Management Strategy, Vol. 18, Issue 2, pp. 393-421, Summer 2009, Available at SSRN: https://ssrn.com/abstract=1396927 or http://dx.doi.org/10.1111/j.1530-9134.2009.00218.x

Adrian N. Majumdar (Contact Author)

RBB Economics ( email )

London WC1V 7BD
United Kingdom

Greg Shaffer

University of Rochester - Simon Business School ( email )

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