A paper by Uğur Akgün (CRA) and Ioana Chioveanu (Brunel University) on loyalty discounts has been published in The B.E. Journal of Economic Analysis & Policy.
This article considers the use of loyalty inducing discounts in vertical supply chains. An upstream supplier and a competitive fringe sell differentiated products to a retailer who has private information about the stochastic demand. The authors compare the market outcomes, when the supplier uses two-part tariffs (2PT), all-unit quantity discounts (AU), and market-share discounts (MS) and show that the retailer’s risk attitude affects supplier’s preferences over these pricing schemes. When the retailer is risk neutral, it bears all the risk and the three schemes lead to the same outcome. When the retailer is risk averse, a 2PT performs the worst from the supplier’s perspective, but it leads to the highest welfare. For a wide range of parameter values (but not for all), the supplier prefers MS to AU. By limiting the retailer’s product substitution possibilities, MS makes the demand for the manufacturer’s product more inelastic. This reduces the amount (share of total profits) the supplier needs to leave to the retailer for the latter to participate in the scheme.
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