Industrial Organization Commons^™

Quantity Discounts And Capital Misallocation In Vertical Relationships, Ken Onishi

Research Collection School Of Economics

I study transactions between aircraft manufacturers and airlines as well as airlines' utilization of their fleet. Aircraft production is characterized by economies of scale via learning-by-doing, which creates a trade-off between current profit and future competitive advantage in the aircraft market. The latter consideration makes large buyers more attractive than small buyers and induces quantity discounts. The resulting nonlinear pricing strategy may distort both production and allocation in favor of large buyers. In the data, there is a negative correlation between the size of aircraft orders and the per-unit price, and a positive correlation between the price paid and the …