DescriptionWe study the incentives of a dominant firm to adopt market-share contracts (MSC) in the presence of competition. We focus on a simple form of MSC which specifies a per-unit price conditional on the share of the buyer’s purchase from the firm satisfying a minimum threshold. When the minimum threshold is 100%, the MSC is an exclusive contract. We find that for any degree of product differentiation, the exclusive contract arises in equilibrium when the relative strength of the dominant firm is large, and a less-than-100% MSC is optimal for the dominant firm when its relative strength is moderate. On the other hand, when the relative strength of the dominant firm is small, the equilibrium involves simple linear pricing. The emergence of full exclusivity depends on a tradeoff between the degree of product differentiation and the asymmetry of the competing firms. The larger the degree of product differentiation, the higher the relative strength is required to justify the full exclusivity. We further discuss the welfare implications of the equilibrium outcome.
(Paper co-authored by Prof. Adam Wong and Prof. Guofu Tan.)
|Period||14 Apr 2022|
|Held at||Tsinghua University, China|