The Dynamic Use of Loyalty Rebates∗

This paper studies the vertical relations between a manufacturer and a retailer over two periods in the presence of a competitive recycling sec-tor. I show that contracts without intertemporal quantity targets lead to inefficient outcomes: the manufacturer distorts first-period output down-wards, in order to reduce the retailer’s payoff under the outside option (i.e. only selling the recycled good) in period 2. I then show that includ-ing second-period quantity targets in the first-period contract restores the efficient outcome, without foreclosing the recycling sector. Such con-tracts can be implemented through loyalty rebates, which are shown to be efficiency-enhancing and non-exclusionary