Efficiency and Foreclosure Effects of Vertical Rebates: Empirical Evidence

Christopher T. Conlon, Julie Holland Mortimer

NBER Working Paper No. 19709
Issued in December 2013
NBER Program(s):   IO

Vertical rebates are prominently used across a wide range of industries. These con- tracts may induce greater retail effort, but may also prompt retailers to drop competing products. We study these offsetting efficiency and foreclosure effects empirically, using data from one retailer. Using a field experiment, we show how the rebate allocates the cost of effort between manufacturer and retailer. We estimate structural models of demand and retailer behavior to quantify the rebate's effect on assortment and retailer effort. We find that the rebate increases industry profitability and consumer utility, but fails to maximize social surplus and leads to upstream foreclosure.

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This paper was revised on August 16, 2016

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Document Object Identifier (DOI): 10.3386/w19709

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