Loyalty Discounts and Price-Cost Tests

Abstract

We analyze, by means of a formal economic model, the use of price-cost tests to assess the competitive effects of loyalty discounts. In the model, a dominant firm enjoys a competitive advantage over its rivals and uses loyalty discounts as a means to boost the demand for its product. We show that in this framework price-cost tests are misleading or, at best, completely uninformative. Our results cast doubts on the applicability of price-tests to loyalty discount cases.

Keywords: Loyalty discounts, As-efficient competitor, Price-cost tests, Sacrifice of profit, Contestable share

JEL Classification: D42, D82, L42