Discounts as a Barrier to Entry

Abstract

To what extent can an incumbent manufacturer use discount contracts to foreclose efficient entry? We show that off-list-price rebates that do not commit buyers to unconditional transfers-like the rebates in EU Commission v. Michelin II, for instance-cannot be anticompetitive. This is true even in the presence of cost uncertainty, scale economies, or intense downstream competition, all three market settings where exclusion has been shown to emerge with exclusive dealing contracts. The difference stems from the fact that, unlike exclusive dealing provisions, rebates do not contractually commit retailers to exclusivity when signing the contract. (JEL D43, D86, K21, L13, L14, L42, L60) Following many real-world examples, suppose we observe a dominant manufacturer offering the following rebate contract to a retail buyer who is considering buying a few units from an alternative small supplier: "As long as you buy exclusively from me, you get 10 percent off the list price on all units you purchase; otherwise, you pay the full list price for as many units as you want." How can the antitrust authority be sure that such a contract is not offered to monopolize the market? Despite its similarity to an exclusive dealing arrangement, which has been shown to effectively foreclose the entry of a more efficient rival in a variety of market settings, one main objective of this paper is to explain why in those same settings the rebate contract above cannot be anticompetitive.One of the most controversial issues in antitrust and competition policy is indeed the potential exclusionary effects of exclusive dealing arrangements, discount contracts (e.g., rebates), and related vertical practices. This controversy dates back at least to United States v. United Shoe Machinery, and Standard Fashion

A Buyer Power Theory of Exclusive Dealing and Exclusionary Bundling

“…34 As a consequence, our commitment assumption is also weaker than that in Aghion and Bolton (1987) and the ensuing literature which require the incumbent to commit on both the contractual form and the terms of trade with the retailer before the entrant shows up. 35 As pointed out in Ide, Montero and Figueroa (2016), these theories rely on the assumption that the retailer contractually commits to exclusivity with the incumbent before the entrant shows up. In contrast, while bargaining with U 1 , we consider that the retailer remains free to leave the negotiation table and deal with U 2 without having to pay any penalty for contractual breach.…”

Market Share Contracts, Exclusive Dealing, and the Integer Problem

“…The RRW-SW strand of literature has also been extended to settings in which buyers compete. 8 In addition to AB's work, related literature includes: Chen and Sappington (2011), who …nd that exclusive dealing generally reduces the entrant's R&D and can reduce the incumbent's R&D, and Ide, Montero, and Figueroa (2016), who …nd that exclusionary contracts cannot be anticompetitive in the absence of upfront payments. Calzolari and Denicolo (2015) look at exclusive-dealing contracts in a setting with one buyer, where the buyer's willingness to pay is private information.…”

Price discrimination and market concentration: Evidence from the laundry detergent market

“…to maintain market power (see, e.g. Brooks, 1961; Ide et al 2016) for an analysis of quantity discounts used to prevent entry). This explains the increasing part of the U‐shaped relationship.…”