Working paper

Promotional Allowances: Loss Leading as an Incentive Device

David Martimort, and Jérôme Pouyet

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.

Keywords

Vertical restraints; loss leading; promotional 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

Reference

David Martimort, and Jérôme Pouyet, “Promotional Allowances: Loss Leading as an Incentive Device”, TSE Working Paper, n. 24-1564, September 2024.

See also

Published in

TSE Working Paper, n. 24-1564, September 2024