Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 08/16: Promotional allowances

Teis Lunde Lømo () and Simen Aardal Ulsaker ()
Additional contact information
Teis Lunde Lømo: Department of Economics, University of Bergen, Postal: P.O.Box 7800, 5020 Bergen, Norway
Simen Aardal Ulsaker: Department of Economics, Norwegian School of Economics, Postal: 5045 Bergen, Norway

Abstract: We study a setting of repeated trade between an upstream manufacturer and two downstream retailers that can exert valuable but noncontractible sales effort. Our focus is the manufacturer’s use of relational contracts with discretionary promotional allowances – payments that reward retailers for effort provision. We show that such contracts enable a sufficiently patient manufacturer to, in equilibrium, provide retailers with the correct incentives and extract the maximal industry profit in every period, and that this outcome cannot be replicated with formal two-part tariffs. These results have implications for the policy treatment of lump-sum payments from manufacturers to retailers, as well as for resale price maintenance.

Keywords: Vertical restraints; Retail services; Repeated games; Relational contracts; Competition policy

JEL-codes: C73; L14; L42; L81

25 pages, October 7, 2016

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