Group Purchasing , Nonlinear Tariffs , and Oligopoly By Howard P . Marvel

Loyalty discounts are nonlinear tari s that condition rebates or marginal prices on meeting aggregate purchase or market share targets. ese discounts are widespread, and are o en the impetus for consumers to form buying groups, or group purchase organizations (GPOs). is papermodels the competitive e ects of the introduction of a GPO to amarket for which the GPO’s member preferences are horizontally di erentiated. We show that although in a monopoly setting, nonlinear tari s are an e ective way to extract consumer surplus, when suppliers compete using such schedules, the results are far more competitive than simple Bertrand-Nash competition with linear tari s. In our model, the nonlinear schedule puts all customers “in play” to a degree that contrasts sharply with the competition at the margin characteristic of constant perunit prices. We demonstrate that asymmetry in preferences does not disturb the e ciency or the price advantage for consumers of our results, but that with asymmetrical preferences, market shares for the preferred supplier are higher than under constant per-unit prices. Finally, we examine the e ects of bundling discount schedules across product categories when oligopolists compete with nonlinear tari s.