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The Double Diamond Paradox

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  • Daniel Garcia
  • Jun Honda
  • Maarten Janssen

Abstract

We study vertical relations in markets with consumer and retailer search. We obtain three important new results. First, we provide a novel explanation for price dispersion that does not depend on some form of heterogeneity among consumers. Price dispersion takes on the form of a bimodal distribution. Second, under competitive conditions (many retailers or small consumer search cost), social welfare is significantly smaller than in the double marginalization outcome. Manufacturers' regular price is significantly above the monopoly price, squeezing retailers' markups and providing an alternative explanation for incomplete cost pass-through. Third, firms' prices are decreasing in consumer search cost.

Suggested Citation

  • Daniel Garcia & Jun Honda & Maarten Janssen, 2017. "The Double Diamond Paradox," American Economic Journal: Microeconomics, American Economic Association, vol. 9(3), pages 63-99, August.
    • Handle: RePEc:aea:aejmic:v:9:y:2017:i:3:p:63-99
    Note: DOI: 10.1257/mic.20150299
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    Cited by:

    1. Garrod, Luke & Olczak, Matthew & Wilson, Chris M., 2020. "Price advertising, double marginalisation and vertical restraints," Economics Letters, Elsevier, vol. 196(C).
    2. Garcia, Daniel & Janssen, Maarten, 2018. "Retail channel management in consumer search markets," International Journal of Industrial Organization, Elsevier, vol. 58(C), pages 162-182.
    3. Honda, Jun, 2015. "Intermediary Search for Suppliers in Procurement Auctions," Department of Economics Working Paper Series 203, WU Vienna University of Economics and Business.
    4. Edona Reshidi, 2022. "Vertical Bargaining and Obfuscation," Staff Working Papers 22-13, Bank of Canada.
    5. Janssen, Maarten & Reshidi, Edona, 2022. "Regulating recommended retail prices," International Journal of Industrial Organization, Elsevier, vol. 85(C).
    6. Janssen, Maarten C.W., 2020. "Vertical contracts in search markets," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    7. Maarten Janssen & Edona Reshidi, 2023. "Discriminatory Trade Promotions in Consumer Search Markets," Marketing Science, INFORMS, vol. 42(2), pages 401-422, March.
    8. Sander Heinsalu, 2018. "Competitive pricing despite search costs if lower price signals quality," Papers 1806.00898, arXiv.org.
    9. Martin Obradovits & Philipp Plaickner, 2023. "Price-Directed Search, Product Differentiation and Competition," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 63(3), pages 317-348, November.
    10. Obradovits, Martin, 2015. "Going to the Discounter: Consumer Search with Local Market Heterogeneities," MPRA Paper 66613, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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