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The Double Diamond Paradox

Daniel Garcia (), Jun Honda () and Maarten Janssen

Vienna Economics Papers from University of Vienna, Department of Economics

Abstract: We study vertical relations in markets with consumer and retailer search. Retailers search to learn manufacturers' prices. We obtain three important new results. First, we explain why empirical distributions of retail prices are bi- modal, with a regular price and a sales price. Second, under competitive condi- tions (many retailers or small consumer search cost) social welfare is signi cantly smaller than in the double marginalization outcome. Manufacturers' regular price is significantly above the monopoly price squeezing retailers' markups and pro- viding an alternative explanation for incomplete cost pass-through. Finally, by randomizing to induce active consumer search, manufacturers can increase their profits.

JEL-codes: D40 D83 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-mic and nep-mkt
Date: 2015-04
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