Document de travail

Promotional Allowances: Loss Leading as an Incentive Device

David Martimort et Jérôme Pouyet

Résumé

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.

Mots-clés

Vertical restraints; loss leading; promotional allowances; below-cost; pricing;

Codes JEL

  • 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

Référence

David Martimort et Jérôme Pouyet, « Promotional Allowances: Loss Leading as an Incentive Device », TSE Working Paper, n° 24-1564, septembre 2024.

Voir aussi

Publié dans

TSE Working Paper, n° 24-1564, septembre 2024