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Why (don’t) firms free ride on an intermediary’s advice?

Bo Shen and Julian Wright ()

International Journal of Industrial Organization, 2019, vol. 64, issue C, 27-54

Abstract: When consumers rely on an intermediary’s advice about which firm to buy from but can switch to buying directly after receiving advice, one might expect firms to discount their direct prices to encourage consumers to purchase directly after obtaining advice, thereby avoiding paying commissions. We provide a theory which can explain why firms often do not free ride in this way, as well as when they do. The theory can explain why online marketplaces and hotel booking platforms impose price-parity clauses to prevent such free riding, while insurance and financial advisors do not.

Keywords: Intermediaries; Platforms; Advice; Price parity (search for similar items in EconPapers)
JEL-codes: D83 L15 L42 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:indorg:v:64:y:2019:i:c:p:27-54