We study vertical relations in markets with consumer and retailer search. We obtain three important new results. First, we provide a novel explanation for price dispersion that does not depend on some form of heterogeneity among consumers. Price dispersion takes on the form of a bimodal distribution. 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. Third, firms' prices are decreasing in consumer search cost.
"The Double Diamond Paradox."
American Economic Journal: Microeconomics,
Consumer Economics: Theory
Firm Behavior: Theory
Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
Oligopoly and Other Imperfect Markets
Industry Studies: Manufacturing: General
Retail and Wholesale Trade; e-Commerce