Measuring the Welfare of Intermediaries in Vertical Markets

Donna, Javier D. and Pereira, Pedro and Pires, Tiago and Trindade, Andre (2019): Measuring the Welfare of Intermediaries in Vertical Markets.

Abstract

We empirically investigate the welfare of intermediaries in oligopolistic markets, where intermediaries offer additional services. We exploit the unique circumstance that, in our empirical setting, consumers can purchase from manufacturers or intermediaries. We specify an equilibrium model, and estimate it using product-level data. The demand includes consumers with costly search and channel-specific preferences. The supply includes two distribution channels. One features bargaining about wholesale prices between manufacturers and intermediaries, and price competition among intermediaries. The other is vertically integrated. The model is used to simulate counterfactuals, where intermediaries do not offer additional services. We find that intermediaries increase welfare.

• Item Type: MPRA Paper
• English Title: We empirically investigate the welfare implications of intermediaries in oligopolistic markets, where intermediaries offer additional services to differentiate their products from the ones of the manufacturers. Our identification strategy exploits the unique circumstance that, in the outdoors advertising industry, there are two distribution channels: consumers can purchase the product either directly from manufacturers, or through intermediaries. We specify a differentiated products’ equilibrium model, and estimate it using product-level data for the whole industry. On the demand side, the model includes consumers who engage in costly search with preferences that are specific to the distribution channel. On the supply side, the model includes two competing distribution channels. One features two layers of activity, where manufacturers and intermediaries bargain over wholesale prices, and intermediaries compete on final prices to consumers. The other is vertically integrated. The estimated model is used to simulate counterfactual scenarios, where intermediaries do not offer additional services. We find that the presence of intermediaries increases welfare because the value of their services outweighs the additional margin charged.
• Language: English
• Keywords: Intermediaries, vertical markets, search frictions, bargaining, outdoor advertising
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness; L - Industrial Organization > L4 - Antitrust Issues and Policies > L42 - Vertical Restraints ; Resale Price Maintenance ; Quantity Discounts; L - Industrial Organization > L8 - Industry Studies: Services > L81 - Retail and Wholesale Trade ; e-Commerce; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M3 - Marketing and Advertising > M37 - Advertising

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