DP13058 Innovation and Distribution: A General Equilibrium Model of Manufacturing and Retailing

Author(s): Bart Bronnenberg
Publication Date: July 2018
Keyword(s): demand, Marketing, Retailing
JEL(s): D11, D21, L13, L81, M31
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13058

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.