Abstract
A retailer can boost demand for a manufacturer’s product through non-verifiable activities. Performance-based trade allowances—rebates conditional on the retailer’s successful sales efforts—help mitigate this moral hazard problem. In equilibrium, the wholesale contract includes a retail price set below cost, complemented by a rebate for incremental units purchased when efforts successfully increase sales. Loss leading thus emerges as an incentive mechanism, rather than a practice driven by anti-competitive or exploitative intent. A ban on below-cost pricing leads to higher retail prices and reduced promotional efforts.
Keywords
vertical restraints; moral hazard; loss leading; performance-based allowances; below-cost pricing;
JEL codes
- L11: Production, Pricing, and Market Structure • Size Distribution of Firms
- L42: Vertical Restraints • Resale Price Maintenance • Quantity Discounts
- L81: Retail and Wholesale Trade • e-Commerce
Replaces
David Martimort, and Jérôme Pouyet, “The Incentive Virtues of Performance-Based Trade Allowances and Loss Leading”, TSE Working Paper, n. 24-1564, September 2024, revised June 2026.
Reference
Jérôme Pouyet, and David Martimort, “The Incentive Virtues of Performance-Based Trade Allowances and Loss Leading”, The Journal of Industrial Economics, June 2026, forthcoming.
See also
Published in
The Journal of Industrial Economics, June 2026, forthcoming