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Measuring the Welfare of Intermediation in Vertical Markets

Javier Donna, Pedro Pereira, Tiago Pires and Andre Trindade

MPRA Paper from University Library of Munich, Germany

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 used 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: D83 L42 L81 M37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com
Date: 2018-07
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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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