Discussion Paper Details

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Title: Retail Discrimination in Search Markets

Author(s): Maarten Janssen and Edona Reshidi

Publication Date: May 2018

Keyword(s): consumer search, double marginalization, Vertical Relations and Wholesale Price Discrimination

Programme Area(s): Industrial Organization

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.

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Bibliographic Reference

Janssen, M and Reshidi, E. 2018. 'Retail Discrimination in Search Markets'. London, Centre for Economic Policy Research.