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http://bura.brunel.ac.uk/handle/2438/7096
Title: | Loyalty discounts |
Authors: | Akgun, U Chioveanu, I |
Keywords: | Vertical contracts;Market share discounts;Asymmetric information |
Issue Date: | 2012 |
Publisher: | Brunel University |
Citation: | Economics and Finance Working Paper, Brunel University, 12-18, Sep 2012 |
Abstract: | This paper considers the use of loyalty inducing discounts in vertical supply chains. An upstream manufacturer and a competitive fringe sell differentiated products to a retailer who has private information about the level of stochastic demand. We provide a comparison of market outcomes when the manufacturer uses two-part tariffs (2PT), all-unit quantity discounts (AU), and market share discounts (MS). We show that retailer's risk attitude affects manufacturer's preferences over these three pricing schemes. When the retailer is risk-neutral, it bears all the risk and all three schemes lead to the same outcome. When the retailer is risk-averse, 2PT performs the worst from manufacturer s perspective but it leads to the highest total surplus. For a wide range of parameter values (but not for all) the manufacturer prefers MS to AU. By limiting the retailer's product substitution possibilities MS makes the demand for manufacturer s product more inelastic. This reduces the amount (share of total profits) the manufacturer needs to leave to the retailer for the latter to participate in the scheme. |
URI: | http://bura.brunel.ac.uk/handle/2438/7096 |
Appears in Collections: | Economics and Finance Publications Dept of Economics and Finance Research Papers |
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