All-Units Discounts in Retail Contracts

31 Pages Posted: 7 Sep 2004

See all articles by Sreya Kolay

Sreya Kolay

Paul Merage School of Business, University of California, Irvine.

Greg Shaffer

University of Rochester - Simon Business School

Janusz A. Ordover

New York University (NYU) - Department of Economics

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.

Suggested Citation

Kolay, Sreya and Shaffer, Greg and Ordover, Janusz A., All-Units Discounts in Retail Contracts. Available at SSRN: https://ssrn.com/abstract=584203

Sreya Kolay (Contact Author)

Paul Merage School of Business, University of California, Irvine. ( email )

United States

HOME PAGE: http://sreya.kolay.googlepages.com

Greg Shaffer

University of Rochester - Simon Business School ( email )

Janusz A. Ordover

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States

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