Open Daily: 10am - 10pm | Alley door pickup 10am - 7pm 3038 Hennepin Ave Minneapolis, MN
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  • Open Daily: 10am - 10pm
    Alley-side Pickup: 10am - 7pm

    3038 Hennepin Ave Minneapolis, MN
    612-822-4611

Open Daily: 10am - 10pm | Alley-side Pickup: 10am - 7pm
3038 Hennepin Ave Minneapolis, MN
612-822-4611
All-units Discounts and Double Moral Hazard

All-units Discounts and Double Moral Hazard

Federal Trade Commission

Paperback

Business General

ISBN10: 1502490641
ISBN13: 9781502490643
Publisher: Createspace
Published: Sep 25 2014
Pages: 40
Weight: 0.26
Height: 0.08 Width: 8.50 Depth: 11.02
Language: English
An all-units discount is a price reduction applied to all units purchased if the customer's total purchases equal or exceed a given quantity threshold. Since the discount is paid on all units rather than marginal units, the tariff is discontinuous and exhibits a negative marginal price at the threshold that triggers the discount. Why would suppliers offer such tariffs? This paper shows that all-units discounts can arise in optimal contracts between upstream and downstream firms with market power who make non-contractible investments that enhance demand. I present conditions under which all-units discounts dominate two-part tariffs and other continuous tariffs. I also examine these tariffs when the upstream market faces a threat of entry. In the cases considered, continuous tariffs are a more profitable device for managing entry than all-units discounts. These findings begin filling the gap in economists' understanding of the equilibrium effects of all-units discounts in intermediate markets in which contract design affects incentives for pricing, investment, and competitive entry.

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