All‐Units Discounts in Retail Contracts

Abstract

All‐units discounts in retail contracts refer to discounts that lower a retailer's wholesale price on every unit purchased when the retailer's purchases equal or exceed some quantity threshold. These discounts pose a challenge to economic theory because it is difficult to understand why a manufacturer ever would charge less for a larger order if its intentions were benign. In this paper, we show that all‐units discounts may profitably arise absent any exclusionary motive. All‐units discounts eliminate double marginalization in a complete information setting, and they extract more profit than would a menu of two‐part tariffs in the standard incomplete information setting with two types of buyers. All‐units discounts may improve or may reduce welfare (relative to menus of two‐part tariffs) depending on demand parameters.