Dual Pricing in a Model of Sales

We study the competitive effects of dual pricing, a vertical restraint that involves charging a distributor a different price for units intended to be resold online than for units intended to be resold offline. We develop a model in which a manufacturer contracts with hybrid retailers, which sell the manufacturer’s product both in their brick-and-mortar stores and through an online channel. We find that dual pricing allows the manufacturer to induce the industry monopoly outcome whereas uniform pricing does not. Yet, dual pricing does not necessarily harm consumers or society at large, as the market outcome is distorted by market power regardless of whether dual or uniform pricing is used. Indeed, we find that consumer surplus and aggregate surplus tend to be higher under dual pricing if the online market is small, if the search costs faced by offline consumers are high, and if the pass-through rate of cost increases is high.