This paper considers the use of loyalty inducing discounts in vertical supply chains. An upstream manufacturer and a competitive fringe sell differentiated products to a retailer who has private information about the level of stochastic demand. We provide an analysis of the market outcomes when the manufacturer uses two-part tariffs (2PT), all-unit discounts (AU) and market share discounts (MS). We show that retailerâ€™s risk attitude affects manufacturerâ€™s preferences over these three pricing schemes. When the retailer is risk-neutral, it bears all the risk and all three schemes lead to the same outcome. When the retailer is risk-averse, 2PT performs the worst from manufacturerâ€™s perspective but it leads to the highest total surplus. For a wide range of parameter values (but not for all) the manufacturer prefers MS to AU. By limiting retailerâ€™s product substitution possibilities MS makes the demand for manufacturerâ€™s product more inelastic. This reduces the amount (share of profits) the manufacturer needs to leave to the retailer for the latter to participate in the scheme.
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