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All‐units discounts as a partial foreclosure device
Author(s) -
Chao Yong,
Tan Guofu,
Wong Adam Chi Leung
Publication year - 2018
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12220
Subject(s) - tying , foreclosure , on demand , product (mathematics) , microeconomics , business , industrial organization , economics , commerce , finance , geometry , mathematics
We investigate the strategic effects of all‐units discounts (AUDs) used by a dominant firm in the presence of a capacity‐constrained rival. Due to the limited capacity of the rival, the dominant firm has a captive portion of the buyer's demand for the single product. As compared to linear pricing, the dominant firm can use AUDs to go beyond its captive portion by tying its captive demand with part of the competitive demand and partially foreclose its small rival. When the rival's capacity level is well below relevant demand, AUDs reduce the buyer's surplus.