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Direct-to-Consumer Sales by Manufacturers and Bargaining

Javier Donna, Pedro Pereira, Andre Trindade and Renan C. Yoshida

MPRA Paper from University Library of Munich, Germany

Abstract: Cutting out the intermediary and selling directly to consumers is an increasingly common strategy by manufacturers in many industries. We develop a structural model of vertical relations where manufacturers both bargain with retailers over wholesale prices and sell their products directly to consumers. We show that direct sales by manufacturers generate two effects that have opposing impact on welfare. First, direct sales generate potential welfare gains to consumers downstream due to additional competition and product variety. Second, in the upstream, there is an increase in the bargaining leverage of the manufacturers selling directly to consumers. Negotiated wholesale prices increase, thus increasing final prices to consumers and decreasing consumer welfare. We show how our model can be used to quantify the bargaining leverage and welfare effects of direct sales. We estimate our model using data from the outdoor advertising industry and use the estimated model to simulate counterfactual scenarios to isolate these effects. We conclude by discussing the relevance of the bargaining leverage effect for vertical merger evaluation.

Keywords: Direct-to-consumer sales; bargaining; vertical mergers; advertising (search for similar items in EconPapers)
JEL-codes: D43 L13 L42 L51 L81 M37 (search for similar items in EconPapers)
Date: 2020-02-05
New Economics Papers: this item is included in nep-com, nep-law, nep-mic and nep-mkt
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Working Paper: Direct-to-Consumer sales by manufacturers and bargaining (2021) Downloads
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