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Price advertising, double marginalisation and vertical restraints

Luke Garrod (), Matthew Olczak and Chris M. Wilson

Economics Letters, 2020, vol. 196, issue C

Abstract: The developing literature on consumer information and vertical relations has yet to consider information provision via costly retail price advertising. By exploring this, we show that the double marginalisation problem exists in equilibrium despite an upstream supplier offering a two-part tariff. Intuitively, the supplier elicits higher retail prices to strategically reduce retailers’ advertising expenditure in order to extract additional rents. We then demonstrate how vertical restraints, such as resale price maintenance, can increase supply-chain profits and consumer welfare by lowering retail prices despite paradoxically discouraging price advertising.

Keywords: Price advertising; Consumer search; Double marginalisation; Vertical restraints; Clearinghouse (search for similar items in EconPapers)
JEL-codes: D40 D83 L42 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:196:y:2020:i:c:s0165176520303608

DOI: 10.1016/j.econlet.2020.109600

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