The double diamond paradox

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.