Working Paper: CEPR ID: DP12945
Authors: Maarten Janssen; Edona Reshidi
Abstract: This paper analyses the incentives of manufacturers to discriminate between exante symmetric retailers who compete for consumers with different search cost. By discriminating, a manufacturer indirectly screens searching consumers, creates more retail competition, increases its profits, but lowers consumer welfare. Low-cost retailers sell to a disproportionate share of low search cost consumers, providing strong incentives to compete; high-cost retailers also lower margins given their smaller customer base. For wholesale price discrimination to be an equilibrium outcome, some form of commitment is necessary. Legislation requiring sales at the recommended retail price serves as such a commitment device, making consumers worse off.
Keywords: vertical relations; consumer search; double marginalization; wholesale price discrimination
JEL Codes: D40; D83; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wholesale price discrimination (L42) | retail competition (L81) |
| retail competition (L81) | manufacturer profits (D49) |
| retail competition (L81) | consumer welfare (D69) |
| commitment (D70) | wholesale price discrimination (L42) |
| consumer search costs (D83) | retail competition (L81) |