David Martimort (Toulouse School of Economics)

David Martimort
Toulouse School of Economics

Coauthors: Ibrahim Abada, Jérôme Pouyet and Lars Stole

Abstract

A seller contracts with a downstream buyer under the threat of upstream entry. The buyer holds private information about both demand and the efficiency gains from entry. This dual information asymmetry shapes the design of nonlinear contracts by balancing strategic and screening considerations. We explain the use of rebates, discounts, and minimum purchase requirements in different scenarios. Under market-share contracts, the seller sets nonlinear tariffs contingent on whether the buyer also sources from the entrant. These contracts reduce screening distortions, bringing marginal prices closer to, though still above, marginal cost conditional on entry. Entry is inefficient, limited by the seller to reduce the buyer’s information rent, and it is positively correlated with consumption. In contrast to market-share contracts, when restricted to a single non-conditional nonlinear tariff, the incumbent faces a trade-off between deterring entry and screening the buyer. In this case, entry is no longer positively correlated with consumption, and marginal prices may even fall below marginal cost. The optimal non-conditional contract shares key features found with all-unit discount tariffs, including a minimum purchase requirement.