DP12048 Selling Through Referrals

Author(s): Daniele Condorelli, Andrea Galeotti, Vasiliki Skreta
Publication Date: May 2017
Keyword(s): asymmetric information, intermediaries, referrals, resale
JEL(s): C72, D44
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12048

We endogenize intermediaries' choice to operate as agents or merchants in a market where there are frictions due to asymmetric information about consumption values. A seller has an object for sale and can reach buyers only through intermediaries. Intermediaries can either mediate the transaction by buying and reselling - the merchant mode - or refer buyers to the seller for a fee - the agency mode. When the seller can condition the minimum selling price to the intermediaries' business model choice, all intermediaries specialize in agency. The seller's and intermediaries' joint profits equal the seller's profits when he has access to all buyers. When the seller's trading protocol does not depend on the business mode adopted by intermediaries, hybrid agency-merchant mode are adopted in equilibrium. Banning the agency mode can decrease welfare since the merchant mode is associated with additional allocative distortions due to asymmetric information compared to agency.