Paper #1605

Title:

Beliefs and consumer search in a vertical industry

Authors:

Maarten Janssen and Sandro Shelegia

Date:

March 2018

Abstract:

This paper studies vertical relations in a search market. As the wholesale arrangement between a manufacturer and its retailers is typically unobserved by consumers, their beliefs about who is to be blamed for a price deviation play a crucial role in determining wholesale and retail prices. The common assumption in the consumer search literature is that consumers exclusively blame an individual retailer for a price deviation. We show that in the vertical relations context, predictions based on this assumption are not robust in the sense that if consumers assign just a small probability to the event that the upstream manufacturer is responsible for the deviation, equilibrium predictions are qualitatively dierent. For the robust beliefs, the vertical model can explain a variety of observations, such as retail price rigidity (or, alternatively, low cost pass-through), non-monotonicity of retail prices in search costs, and (seemingly) collusive retail behavior. The model can be used to study a monopoly online platform that sells access to final consumers.

Keywords:

Vertical relations, consumer search, double marginalization, product differentiation, price rigidities

JEL codes:

D40, D83, L13

Area of Research:

Business Economics and Industrial Organization

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