The Strategic Use of Early Bird Discounts for Dealers

Abstract: Rent sharing is a common phenomenon in vertical settings. For example, a manufacturer may wish to award his dealers economic rents to motivate their provision of non-contractible services. We study a widely-used ordering process (“Early Bird Discounts for Dealers”) that generates downstream rents and characterize circumstances when a manufacturer would strictly prefer it to linear pricing and the standard two-part tariff contract with nonnegative access fees.