A Comparison of the Wholesale Structure and the Agency Structure in Differentiated Markets

We compare the wholesale structure and the agency structure characterizing a supply and distribution chain in a bilateral duopoly model with product differentiation at both the supplier level and the retailer level. We first assess welfare implications under the two structures. Relative to the wholesale structure, we find that the agency structure leads to lower retail prices, higher demand and higher consumer surplus. A social planner always enjoys higher differentiation in the market, and her favoured business format shifts from the wholesale structure to the agency structure as goods and services become more differentiated. We then examine firms’ preferences over the alternative schemes. Suppliers prefer the wholesale structure whereas retailers prefer the agency structure as long as the degrees of differentiation at the supplier level are not too low. Ceteris paribus, the social planner prefers when retailers can choose their preferred business format if suppliers and retailers have conflicting preferences.