DP14815 Multiproduct Intermediaries

Author(s): Andrew Rhodes, Makoto Watanabe, Jidong Zhou
Publication Date: May 2020
Keyword(s): Direct-to-consumer sales, Exclusivity, intermediaries, Multiproduct demand, Product range, search
JEL(s): D83, L42, L81
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14815

This paper develops a new framework for studying multiproduct intermediaries when consumers demand multiple products and face search frictions. We show that a multiproduct intermediary is profitable even when it does not improve consumer search efficiency. In its optimal product selection, it stocks high-value products exclusively to attract consumers to visit, then profits by selling non-exclusive products which are relatively cheap to buy from upstream suppliers. However, relative to the social optimum, the intermediary tends to be too big and stock too many products exclusively. As applications we use the framework to study the optimal design of a shopping mall, and the impact of direct-to-consumer sales by upstream suppliers on the retail market.