Robust Exclusion Through Loyalty Discounts

Robust Exclusion Through Loyalty Discounts

We consider loyalty discounts whereby the seller promises to give buyers who commit to buy from it a lower price than the seller gives to uncommitted buyers. We show that an incumbent seller can use loyalty discounts to soften price competition between itself and a rival, which raises market prices to all buyers. Each individual buyer’s agreement to a loyalty discount externalizes most of the h...

Robust Exclusion Through Loyalty Discounts With Buyer Commitment

Anti-Competitive Exclusion and Market Division Through Loyalty Discounts

We show that loyalty discounts create an externality among buyers even without economies of scale or downstream competition, and whether or not buyers make any commitment. Each buyer who signs a loyalty discount contract softens competition and raises prices for all buyers. We prove that, provided the entrant’s cost advantage is not too large, with enough buyers, this externality implies that i...

WORKING PAPERS Naked Exclusion by a Dominant Supplier: Exclusive Contracting and Loyalty Discounts

FTC Bureau of Economics working papers are preliminary materials circulated to stimulate discussion and critical comment. The analyses and conclusions set forth are those of the authors and do not necessarily reflect the views of other members of the Bureau of Economics, other Commission staff, or the Commission itself. Upon request, single copies of the paper will be provided. References in pu...

How Loyalty Discounts Can Perversely Discourage Discounting

Loyalty discounts are agreements to sell at a lower price to buyers who buy all or most of their purchases from the seller. This article proves that loyalty discounts can create anticompetitive effects, not only because they can impair rival efficiency, but also because loyalty discounts can perversely discourage discounting even when they have no effect on rival efficiency. The essential reaso...