On the anti-competitive effects of quantity discounts ☆ Giacomo Calzolari a,b , Vincenzo Denicolò a,c, ⁎ a University of Bologna, Italy b CEPR, United Kingdom c University of Leicester, United Kingdom abstract article info Article history: Received 26 October 2010 Received in revised form 21 December 2010 Accepted 23 December 2010 Available online 18 January 2011 JEL classification: D42 D82 L42 Keywords: Quantity discounts Non-linear pricing Exclusion Dominant firm We analyze the competitive effects of quantity discounts in an asymmetric duopoly. We find that for a sizeable set of parameter values, quantity discounts harm the smaller firm and reduce consumers' surplus. They can even decrease social welfare, i.e. the sum of producers' and consumers' surpluses. However, the circumstances in which quantity discounts may decrease social welfare are limited and difficult to identify in practice. © 2011 Elsevier B.V. All rights reserved. 1. Introduction A lively policy debate is currently taking place on the competitive effects of loyalty discounts. 1 This generic term encompasses various types of conditional rebates, including quantity discounts (where the seller offers price reductions for bulk purchases), 2 bundled discounts (where price discounts are conditional upon the customer's total purchases of various products supplied by the firm), 3 and market- share discounts (i.e. discounts that are conditional upon the firm's share of the customer's total purchases). 4 Of all loyalty discounts, quantity discounts are regarded as the most innocuous. It is generally recognized that they may simply represent a way of passing economies of scale on to buyers, or of enabling firms to better extract consumer surplus. Nevertheless, antitrust authorities are sometimes concerned that dominant firms can use quantity discounts to eliminate or soften competition. One concern is that quantity discounts may provide a cost-effective way of engaging in predatory pricing, by depriving a rival of economies of scale so as to drive it out of business. 5 Another concern, which is the subject of this paper, is that quantity discounts can have exclusionary effects even if they are not part of a predatory strategy, especially when the competing firms are highly asymmetric. 6 To assess this latter concern, we analyze a model where two asymmetric firms supply differentiated products to consumers who are privately informed about demand for those products. The model is timeless – a static, one-shot game of price competition – so there can be no room for predatory pricing. We also rule out economies of scale. However, firms may use non-linear prices to discriminate among ☆ We thank Piercarlo Zanchettin and participants in the Earie conference at Istanbul for useful comments. ⁎ Correspondence to: V. Denicolò, University of Bologna, Italy. E-mail addresses: giacomo.calzolari@unibo.it (G. Calzolari), vin.denicolo@gmail.com (V. Denicolò). 1 See, for instance, Heimler (2005), Kobayashi (2005), Spector (2005), Faella (2008), Ordover and Shaffer (2007), and Ahlborn and Bailey (2006). 2 See Kolay et al. (2004), Beard et al. (2007), and Martimort and Stole (2009). 3 See Brennan (2008), Carlton et al. (2008), Klein and Lerner (2008), Greenlee et al. (2008), and Armstrong and Vickers (2010). 4 Market-share discounts also include exclusionary discounts as a limiting case. See Bernheim and Whinston (1998), Calzolari and Denicolò (2009), Majumdar and Shaffer (2009), and Mills (2010). 5 This theory seems to be the basis for the current policy in the U.S., where the courts are reluctant to prohibit single-product quantity discounts under the antitrust laws. In two recent decisions – Brooke Group and Concord Boats – the courts have explicitly applied the standards required in predatory pricing cases to quantity discounts. 6 This concern seems to be implicitly or explicitly the basis of the European case law, which is harsher than the American one. In Michelin II, for instance, the European Court of Justice ruled that any quantity discount that does not reflect cost efficiencies, if practiced by dominant firms, is presumed to be abusive. The European Court of Justice did not require proof that marginal price falls short of unit cost (Waelbroeck, 2005). International Journal of Industrial Organization 29 (2011) 337–341 0167-7187/$ – see front matter © 2011 Elsevier B.V. All rights reserved. doi:10.1016/j.ijindorg.2010.12.003 Contents lists available at ScienceDirect International Journal of Industrial Organization journal homepage: www.elsevier.com/locate/ijio