Beliefs and Consumer Search in a Vertical Industry

Maarten Janssen and Sandro Shelegia

No 1033, Working Papers from Barcelona School of Economics

Abstract: This paper studies vertical relations in a search market. As the wholesale arrangement between a manufacturer and its retailers is typically unobserved by consumers, their beliefs about who is to be blamed for a price deviation play a crucial role in determining wholesale and retail prices. The common assumption in the consumer search literature is that consumers exclusively blame an individual retailer for a price deviation. We show that in the vertical relations context, predictions based on this assumption are not robust in the sense that if consumers assign just a small probability to the event that the upstream manufacturer is responsible for the deviation, equilibrium predictions are qualitatively different. For the robust beliefs, the vertical model can explain a variety of observations, such as retail price rigidity (or, alternatively, low cost pass-through), non-monotonicity of retail prices in search costs, and (seemingly) collusive retail behavior. The model can be used to study a monopoly online platform that sells access to final consumers.

Keywords: Double Marginalization; vertical relations; consumer search; product differentiation; price rigidities (search for similar items in EconPapers)
JEL-codes: D40 D83 L13 (search for similar items in EconPapers)
Date: 2018-03
New Economics Papers: this item is included in nep-com, nep-mic and nep-mkt
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Related works:
Journal Article: Beliefs and Consumer Search in a Vertical Industry (2020)
Working Paper: Beliefs and consumer search in a vertical industry (2018)
Working Paper: Beliefs and Consumer Search in a Vertical Industry (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:1033

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