Paper Abstract
723. Einer Elhauge & Abraham L. Wickelgren, Anti-Competitive Market Division Through Loyalty Discounts Without Buyer Commitment, 08/2012.
Abstract: We show that loyalty discounts without buyer commitment create an externality
among buyers because each buyer who signs a loyalty discount contract softens
competition and raises prices for all buyers. This externality can enable an
incumbent to use loyalty discounts to effectively divide the market with its rival
and raise prices. We prove that, provided the entrant's cost advantage is not too
large, with enough buyers, this externality implies that in any equilibrium some
buyers sign loyalty discount contracts, segmenting the market and reducing
consumer welfare and total welfare. These propositions are true even if the buyers
coordinate, the entrant is more efficient, the loyalty discounts cover less than half
the market, and all the loyalty discounts are above cost. We also prove that these
propositions hold even if we assume no economies of scale, no downstream
competition, no buyer switching costs, no financial constraints, no limits on rival
expandability, and no intraproduct bundle of contestable and incontestable
demand.