Volume discounts, loss leaders, and competition for more profitable customers. Federal Trade Commission Bureau of Economics, Working Paper 260

When some customers are more profitable to serve than others, one might expect sellers to compete more vigorously for the more profitable customers. One way sellers might do this is to sell goods that are purchased primarily by the most profitable customers using a lower mark-up than on other goods. This allows the firms to give discounts to more profitable customers without offering them to less profitable customers. This paper presents a model in which competing multi-product firms facing customers that purchase different quantities of goods, set prices in this manner. This model suggests a theory of multi-product pricing in which the markup on any particular product is inversely related to the average profitability of the customer that purchases the good. One interesting implication of this paper is that loss leader pricing might be viewed as a way for firms to compete more vigorously for more profitable customers. Such an explanation offers another characteristic of products that should be used as loss leaders. This explanation provides potentially testable implications about the types of goods that can (or ought to) be used as loss leaders and can explain why grocery stores sell turkeys as loss leaders at Thanksgiving and lower the price of eggs at Easter, but not flowers on Mother's Day, or candy on Valentines Day

Central Office Bill and Keep as a Unified Inter-Carrier Compensation Regime

This Article proposes a single approach to interconnection pricing called Central Office Bill and Keep ( COBAK\u27), which applies to both local and long-distance traffic. COBAK is a default interconnection regime, which means it would apply only when two networks cannot agree on terms for interconnection. The COBAK proposal, as applied to local calls between two networks, consists of two rules. First, a called party\u27s carrier cannot charge an interconnecting carrier to terminate a call. (Thus, each carrier recovers the cost of the loop and switch that serves the loop primarily from its own end-user customers). Second, the calling party\u27s network is responsible for the cost of transporting a call between the calling party\u27s central office and the called party\u27s central office. These rules are easily extended to long-distance calls or other calls involving three or more networks. COBAK will solve or ameliorate many of the significant problems that plague the existing interconnection regimes

Bill and Keep as the Efficient Interconnection Regime?: A Reply

In a critique of my paper outlining the Central Office Bill and Keep (COBAK) proposal, Wright (2001) offers two sets of conditions under which a COBAK interconnection regime would not lead to optimal utilization. While there could be conditions under which some interconnection regime other than COBAK would lead to higher social surplus measures in very simple models of telecommunications, the critique provides no evidence that these conditions would be empirically significant. This, along with the other considerations explained in the proposal and not considered in the analysis, continue to suggest that COBAK is an appropriate policy recommendation.

No Lease is Short Enough to Solve the Time Inconsistency Problem.

The author provides a model of endogenous lease duration determination in the context of the durable goods monopolist problem. He shows that infinitely many leases (per finite unit of time) are required to solve completely the time inconsistency problem, thus suggesting that leasing may not provide a practical solution. The author also provides a warning regarding the results that can be derived by exogenously setting lease durations equal to 'one period' by resolving a paradoxical result in the literature. Copyright 1994 by Blackwell Publishing Ltd.