Working Paper: CEPR ID: DP13058
Authors: Bart Bronnenberg
Abstract: I propose a general equilibrium model of competition in manufacturing and retailing. Relative to the counterfactual of direct sales by manufacturers, the retail sector increases manufacturing entry and produced variety. Although double marginalization in the sales channel raises prices and hurts consumers in quantity, the retail sector increases variety and convenience, both valued positively. Pricing power in the vertical channel reflects surplus or scarcity of manufactured substitutes relative to retailer store size. Finally, the size of the retail sector is a constant fraction of the total economy across nations of differing size and wealth.
Keywords: marketing; retailing; demand
JEL Codes: D11; D21; L13; L81; M31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher distribution costs (D39) | limit manufacturer entry (D45) |
| limit manufacturer entry (D45) | affect production of variety (L23) |
| lower distribution costs (D39) | facilitate larger retail assortments (L81) |
| facilitate larger retail assortments (L81) | increase manufacturing entry (L69) |
| lower costs in retailing (L81) | enhance variety in manufacturing (L23) |
| retail sector increases manufacturing entry (L81) | lowers consumer transaction costs (D16) |
| lowers consumer transaction costs (D16) | raises demand for variety (R22) |
| double marginalization raises prices (D40) | increases product variety (L15) |
| double marginalization raises prices (D40) | increases convenience (L81) |
| increased product variety and convenience (L15) | positively impacts consumer welfare (F61) |
| pricing power in the vertical channel arises from relative costs of manufacturing vs retailing (L11) | influences margins in both sectors (F69) |