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Promotional Allowances: Loss Leading as an Incentive Device

Author

Listed:
  • David Martimort

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Jerome Pouyet

    (ESSEC Business School and THEMA (UMR 8184) - ESSEC Business School - THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)

Abstract

A retailer may boost demand for a manufacturer's product through unobservable promotional efforts. Fixed fees cannot be used to freely allocate profit within the vertical structure. When manufacturers have market power, the equilibrium wholesale contract features a retail price below cost together with a rebate for incremental units bought by the retailer when effort has succeeded in boosting sales. Loss leading emerges as an incentive device in such an incomplete contracting scenario. A ban on below-cost pricing leads to a higher retail price and a lower promotional effort.

Suggested Citation

  • David Martimort & Jerome Pouyet, 2024. "Promotional Allowances: Loss Leading as an Incentive Device," Working Papers halshs-04684854, HAL.
    • Handle: RePEc:hal:wpaper:halshs-04684854
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-04684854v1
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