Vertical Bargaining and Obfuscation [paper] - Job Market Paper
Manufacturers often engage in obfuscation practices that impede consumer search. Examples include proliferating product varieties and imposing vertical informational restraints such as MAPs and bans on online sales, that make it more difficult for consumers to compare prices. This paper models vertical bargaining over wholesale prices and obfuscation levels, and finds that obfuscation arises in equilibrium whenever retailers have some bargaining power. Once the bargaining power rests with the manufacturer, while the equilibrium involves no obfuscation, final consumers are made worse off since the manufacturer acts as a monopolist. We show that, in vertical markets, policies that impose caps on obfuscation may backfire since they induce higher wholesale prices, thus higher retail price. Instead, we propose caps on wholesale prices as an effective consumer protection policy.
This paper shows that in markets where consumer search is important, manufacturers have an incentive to exacerbate ex ante cost differences between retailers by offering them different wholesale contracts. If retailers have ex ante symmetric cost, a manufacturer may want to create asymmetries. The mechanism relies on consumers having heterogeneous search cost and applies even if they have identical demand. By discriminating, manufacturers create a more competitive retail market, boosting their demand and increasing their profits. Expecting price dispersion in the retail market, but (before searching) not knowing which retailers have lower prices, consumers with lower search costs continue searching when they encounter a higher retail price at their first search. Search creates more retail competition, as low-cost retailers sell to a disproportionately larger share of low search cost consumers, providing strong incentives to compete, while high-cost retailers also lower margins given their smaller customer base. Consumers can be better off because of wholesale price discrimination.
Work in progress
Wholesale Price Discrimination and Recommended Retail Prices - with Maarten Janssen
In this paper we consider vertical markets with consumer search where the manufacturer cannot commit to its unobserved wholesale contracts. We show that wholesale price discrimination cannot arise in equilibrium. We look at the effect of non-binding Recommended Retail Prices (RRPs) and the regulation imposed by the U.S Code of Federal Regulations, used by the Federal Trade Commission, which requires that at least some sales have to take place at the recommended prices. We argue that this regulation effectively facilitates the manufacturer to commit and discriminate its retailers. The manufacturer may announce the retail price that the high cost retailer finds optimal to charge as the RRP. Given the regulation, the manufacturer is not free to deviate and sell to all retailers at the lower wholesale price that generates more profits. Therefore, once this possible deviation is eliminated, wholesale price discrimination can be sustained as an equilibrium outcome. Wholesale and retail prices are higher when wholesale contracts are unobserved compared to settings when they are observed, and the differences do not disappear even if search costs vanish.