Agency Pricing and Bargaining: Evidence from the E-Book Market

Babur De los Santos (), Daniel P. O'Brien () and Matthijs Wildenbeest
Additional contact information
Babur De los Santos: John E. Walker Department of Economics, Clemson University
Daniel P. O'Brien: Compass Lexecon

No 18-14, Working Papers from NET Institute

Abstract: This paper examines the relationship between two types of vertical contracts and retail prices under bilateral bargaining. In contrast to traditional wholesale contracts, in agency contracts upstream suppliers set retail prices directly while downstream retailers act as agents who receive a sales royalty. Our model shows that whether agency contracts lead to higher or lower retail prices (vs. wholesale contracts) depends on the distribution of bargaining power between upstream and downstream firms. We propose a methodology to structurally estimate a demand and supply model that allows for both vertical contracting models and uses the Nash-in-Nash bargaining solution to capture competition between upstream and downstream firms. We apply our model to the e-book industry, which has experienced several transitions between agency and wholesale contracts. Our analysis studies the latest transition from wholesale to agency contracts after the expiration of a two-year ban on agency pricing following the settlement of a lawsuit brought by the U.S. Department of Justice against major publishers in the industry. This ban allowed us to observe new agency contracts after a rarely seen restart of bilateral bargaining between publishers and retailers. Using a unique dataset of e-book prices both before and after the change in selling method, we show that prices increased substantially at Amazon following the shift to agency but remained relatively flat at Barnes & Noble. Structural estimates show that our bargaining model gives a better fit to the data than a model with take-it-or-leave-it input contracts. Counterfactual simulations indicate that reinstitution of most favored nation clauses, which were banned in 2012 for a period of five years, would lead to price increases of close to nine percent for non-fiction books.

Keywords: e-books; agency agreements; vertical restraints; bargaining; most favored nation (search for similar items in EconPapers)
JEL-codes: C14 D83 L13 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2018-10
New Economics Papers: this item is included in nep-com, nep-cta, nep-cul and nep-gth
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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