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Market-Share Contracts with Asymmetric Information

Author

Listed:
  • Adrian Majumdar

    (Centre for Competition Policy, University of East Anglia)

  • Greg Shaffer

    (Simon School of Business, University of Rochester)

Abstract

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 proï¬ table, and we show that, in some cases, the full-information outcome can be obtained (unlike in standard screening models, where the agent 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, ï¬ delity rebates and all-units discounts. We provide a new motive for a dominant ï¬ rm to bundle its own product with a competitively supplied product (with ambiguous consequences for welfare), and we show that market-share contracts, which are a subset of ï¬ delity rebates, are more proï¬ table than all-units discounts.

Suggested Citation

  • Adrian Majumdar & Greg Shaffer, 2007. "Market-Share Contracts with Asymmetric Information," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2007-17, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    • Handle: RePEc:uea:ueaccp:2007_17
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    References listed on IDEAS

    as
    1. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, April.
    2. Bruce Kobayashi, 2005. "The Economics of Loyalty Rebates and Antitrust Law in the United States," CPI Journal, Competition Policy International, vol. 1.
    3. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    4. Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July.
    5. Spector, David, 2005. "Loyalty Rebates : An Assessment of Competition Concerns and a Proposed Rule of Reason," CEPREMAP Working Papers (Docweb) 0514, CEPREMAP.
    6. David Spector, 2005. "Loyalty Rebates: An Assessment of Competition Concerns and a Proposed Structured Rule of Reason," Post-Print halshs-00754113, HAL.
    7. Lewis, Tracy R. & Sappington, David E. M., 1989. "Countervailing incentives in agency problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 294-313, December.
    8. Alberto Heimler, 2005. "Below-Cost Pricing and Loyalty-Inducing Discounts: Are They Restrictive and If So, When?," CPI Journal, Competition Policy International, vol. 1.
    9. David Spector, 2005. "Loyalty Rebates: An Assessment of Competition Concerns and a Proposed Structured Rule of Reason," CPI Journal, Competition Policy International, vol. 1.
    10. Sreya Kolay & Greg Shaffer & Janusz A. Ordover, 2004. "All‐Units Discounts in Retail Contracts," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(3), pages 429-459, September.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Liliane Giardino-Karlinger, 2016. "Vertical Relations in the Presence of Competitive Recycling," Journal of Industry, Competition and Trade, Springer, vol. 16(1), pages 25-49, March.
    2. Sloev, Igor, 2007. "Market Share Discounts and Investment Incentives," MPRA Paper 13990, University Library of Munich, Germany.
    3. Adrian Majumdar & Greg Shaffer, 2009. "Market‐Share Contracts with Asymmetric Information," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(2), pages 393-421, June.

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    More about this item

    Keywords

    Adverse Selection; Screening; Bundling; Fidelity Rebates; All-Units Discounts.;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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