Price-Cost Tests and Loyalty Discounts
33 Pages Posted: 15 May 2018
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Loyalty Discounts and Price-Cost Tests
Date Written: May 2018
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
Suggested Citation: Suggested Citation