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Context-dependent preferences and retailing: Vertical restraints on internet sales

Magdalena Helfrich and Fabian Herweg ()

Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), 2020, vol. 87, issue C

Abstract: We provide an explanation for a frequently observed vertical restraint in e-commerce, namely that brand manufacturers partially or completely prohibit that retailers distribute their high-quality products over the internet. We assume that a consumer has context-dependent preferences in the sense that he overvalues a product attribute – quality or price – that stands out in the choice set. Our analysis reveals the following: If online competition determines the margin a retailer can charge at his brick-and-mortar store, he has no incentive to draw consumers’ attention to a product’s high quality. If however, the high-quality branded good is not available online, a retailer can charge a significant markup on it and this markup is higher if consumers focus on quality rather than price. Thus, a ban on online sales aligns a retailer’s incentive with the brand manufacturer’s interest to highlight its relative advantage, quality, and allows the manufacturer to charge a higher wholesale price. Consumer welfare and total welfare, however, are higher if distribution systems that prohibit internet sales are forbidden.

Keywords: Context-dependent preferences; Decoy good; Internet competition; Relative thinking; Retailing; Selective distribution (search for similar items in EconPapers)
JEL-codes: D43 K21 L42 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.socec.2020.101556

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