DP12945 Retail Discrimination in Search Markets

Author(s): Maarten Janssen, Edona Reshidi
Publication Date: May 2018
Date Revised: February 2019
Keyword(s): consumer search, double marginalization, Vertical Relations, Wholesale Price Discrimination
JEL(s):
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12945

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.