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Measuring the Welfare of Intermediation in Vertical Markets

Javier D. Donna (), Pedro Pereira, Tiago Pires () and Andre Trindade
Additional contact information
Javier D. Donna: The Ohio State University
Tiago Pires: Department of Economics, University of North Carolina

No 103, GEE Papers from Gabinete de Estratégia e Estudos, Ministério da Economia

Abstract: We empirically investigate the welfare implications of intermediaries in oligopolistic markets, where intermediaries offer additional services to differentiate their products from the ones of the manufacturers. Our identification strategy exploits the unique circumstance that, in the outdoors advertising industry, there are two distribution channels: consumers can purchase the product either directly from manufacturers, or through intermediaries. We specify a differentiated products’ equilibrium model, and estimate it using product-level data for the whole industry. On the demand side, the model includes consumers who engage in costly search with preferences that are specific to the distribution channel. On the supply side, the model includes two competing distribution channels. One features two layers of activity, where manufacturers and intermediaries bargain over wholesale prices, and intermediaries compete on final prices to consumers. The other is vertically integrated. The estimated model is sed to simulate counterfactual scenarios, where intermediaries do not offer additional services. We find that the presence of intermediaries increases welfare because the value of their services outweighs the additional margin charged.

Keywords: Intermediaries; vertical markets; search frictions; bargaining; outdoor advertising (search for similar items in EconPapers)
JEL-codes: L81 L42 D83 M37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ind and nep-mkt
Date: 2018-05, Revised 2018-05
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http://www.gee.gov.pt//RePEc/WorkingPapers/GEE_PAPERS_103.pdf First version, 2018 (application/pdf)

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Working Paper: Measuring the Welfare of Intermediation in Vertical Markets (2018) Downloads
Working Paper: Measuring the Welfare of Intermediation in Vertical Markets (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:mde:wpaper:00103

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