Faculty of Economics and Business Administration Publications Database

Market-Share Contracts as Facilitating Practices

Shaffer, Greg
Volume: 41
Number: 4
Pages: 709 - 729
Month: Winter
ISSN-Print: 1756-2171
Link External Source: Online Version
Year: 2010

This article investigates how the use of contracts that condition discounts on the share a supplier receives of a retailer''s total purchases (market-share contracts) may affect market outcomes. The case of a dominant supplier that distributes its product through retailers that also sell substitute products is considered. It is found that when the supplier''s contracts can only depend on how much a retailer purchases of its product (own-supplier contracts), intra- and interbrand competition cannot simultaneously be dampened. However, competition on all goods can simultaneously be dampened when market-share contracts are feasible. Compared to own-supplier contracts, the use of market-share contracts increases the dominant supplier''s profit and, if demand is linear, lowers consumer surplus and welfare.