Consumer Search and Vertical Relations: The Triple Marginalization Problem

Maarten Janssen and Sandro Shelegia

Vienna Economics Papers from University of Vienna, Department of Economics

Abstract: This paper shows that the double marginalization problem significantly underestimates the inefficiencies arising from vertical relations in markets where consumers who are uninformed about the wholesale arrangements between manufacturers and retailers search for the best retail price. Consumer search provides manufacturers an additional incentive to substantially increase wholesale prices. Consequently, all market participants are worse off and we call this phenomenon the triple marginalization problem. We also show that, when the wholesale price is unknown, retail prices decrease and industry profits and consumer surplus increase in search cost, whereas the opposite is true when the wholesale price is known.

JEL-codes: D40 D83 L13 (search for similar items in EconPapers)
Date: 2012-10
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