The double diamond paradox

Publications: Working paper

Abstract

We study vertical relations in markets with consumer and retailer search. Retailers search to learn manufacturers' prices. We obtain three important new results. First, we explain why empirical distributions of retail prices are bimodal, with a regular price and a sales price. 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. Finally, by randomizing to induce active consumer search, manufacturers can increase their profits.
Original languageEnglish
Number of pages41
Publication statusPublished - Apr 2015

Publication series

SeriesVienna Economics Papers
NumberNo. 1504

Austrian Fields of Science 2012

  • 502047 Economic theory

Keywords

  • Vertical relations, retailer search, consumer search

Cite this