Efficiency and Foreclosure Effects of All-Units Discounts: Empirical Evidence

All-Units Discounts provide rebates on all (future and previous) units when a re-tailer’s purchase exceeds a threshold. This may induce greater retailer effort, but may also prompt retailers to drop competing products. We use detailed data for a confec-tions retailer, and variation from a field experiment, to study these offsetting efficiency and foreclosure effects. We show how the contract allocates stock-out costs between manufacturer and retailer, and estimate structural models of demand and retailer effort to quantify efficiency gains. We find that the contract increases social welfare, but fails to implement the welfare-maximizing product assortment, and results in foreclosure. ∗We thank Mark Stein, Bill Hannon, and the drivers at Mark Vend Company for implementing the experiment used in this paper, providing data, and generally educating us about the vending industry. We