THE COMPETITIVE EFFECTS OF LOYALTY DISCOUNTS IN A MODEL OF COMPETITION IMPLIED BY THE DISCOUNT ATTRIBUTION TEST

The cost to the buyer of accepting either seller's offer is that it loses discounts on the other seller's non-contested sales. Because a buyer's lost discounts are larger if it accepts the less preferred seller's loyalty discount offer, this gives the more preferred seller an advantage over the less preferred seller in competing for contested sales in that it can offer a higher discounted price than its rival and still win the contested sales. [...]although the less preferred seller has an advantage competing for contested sales in a single-price equilibrium, the more preferred seller has an advantage in the loyalty-discount equilibrium. In this case, the less preferred seller offers more of a constraint on the price of the more preferred seller in the single-price equilibrium where it has more of an advantage. [...]while loyalty discounts do not cause the loyalty-discount equilibrium if the less preferred seller loses sales as a result of loyalty discounts Seller B makes sales in the single-price equilibrium as long as P*a > P*b If so, then it loses sales in the loyalty-discount equilibrium if Ca < Cb since the lower production cost seller wins sales in the loyalty-discount equilibrium. According to (6), P*i is an increasing function of Ci, so if P*b < P*a when Cb = Ca, it must also be true if Cb < Ca. For Qc and Qnb, buyers pay P*b in the single-price equilibrium and Pa in the loyalty-discount equilibrium. [...]buyer costs are higher with loyalty discounts in this situation.