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Price advertising, double marginalisation and vertical restraints

Author

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  • Garrod, Luke
  • Olczak, Matthew
  • Wilson, Chris M.

Abstract

The developing literature on consumer information and vertical relations has yet to consider information provision via costly retail price advertising. By exploring this, we show that the double marginalisation problem exists in equilibrium despite an upstream supplier offering a two-part tariff. Intuitively, the supplier elicits higher retail prices to strategically reduce retailers’ advertising expenditure in order to extract additional rents. We then demonstrate how vertical restraints, such as resale price maintenance, can increase supply-chain profits and consumer welfare by lowering retail prices despite paradoxically discouraging price advertising.

Suggested Citation

  • Garrod, Luke & Olczak, Matthew & Wilson, Chris M., 2020. "Price advertising, double marginalisation and vertical restraints," Economics Letters, Elsevier, vol. 196(C).
    • Handle: RePEc:eee:ecolet:v:196:y:2020:i:c:s0165176520303608
    DOI: 10.1016/j.econlet.2020.109600
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    References listed on IDEAS

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    1. John Asker & Heski Bar-Isaac, 2020. "Vertical Information Restraints: Pro- and Anticompetitive Impacts of Minimum-Advertised-Price Restrictions," Journal of Law and Economics, University of Chicago Press, vol. 63(1), pages 111-148.
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    3. Maarten Janssen & Sandro Shelegia, 2015. "Consumer Search and Double Marginalization," American Economic Review, American Economic Association, vol. 105(6), pages 1683-1710, June.
    4. Morgan, John & Orzen, Henrik & Sefton, Martin, 2006. "A laboratory study of advertising and price competition," European Economic Review, Elsevier, vol. 50(2), pages 323-347, February.
    5. 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.
    6. Michael R. Baye & John Morgan, 2001. "Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets," American Economic Review, American Economic Association, vol. 91(3), pages 454-474, June.
    7. Janssen, Maarten C.W., 2020. "Vertical contracts in search markets," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    8. Maarten C. W. Janssen & T. Tony Ke, 2020. "Searching for Service," American Economic Journal: Microeconomics, American Economic Association, vol. 12(1), pages 188-219, February.
    9. 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.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Price advertising; Consumer search; Double marginalisation; Vertical restraints; Clearinghouse;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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