Working Paper: CEPR ID: DP15537
Authors: Maarten Janssen; Santanu Roy
Abstract: Asymmetric information about product quality can create incentives for a privately informed manufacturer to sell to uninformed consumers through a retailer and to maintain secrecy of upstream pricing. Delegating retail price setting to an intermediary generates pooling equilibria that avoid signaling distortions associated with direct selling even under reasonable restrictions on beliefs; these beliefs can also prevent double marginalization by the retailer. Expected profit, consumer surplus and social welfare can all be higher with intermediated selling. However, if secrecy of upstream pricing cannot be maintained, selling through a retailer can only lower the expected profit of the manufacturer.
Keywords: asymmetric information; product quality; delegation; intermediary; signaling
JEL Codes: L13; L15; D82; D43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Manufacturer's decision to delegate pricing to retailers (D49) | Improved expected profits (G17) |
| Manufacturer's decision to delegate pricing to retailers (D49) | Enhanced consumer surplus (D11) |
| Manufacturer's decision to delegate pricing to retailers (D49) | Raises overall social welfare (D69) |
| Delegation of pricing (D49) | Avoids signaling distortions (C22) |
| Secrecy of upstream pricing is compromised (D49) | Decline in expected profits for manufacturers (L69) |
| Asymmetric information (D82) | Signaling distortions (D83) |