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24.05. Micro Theory Seminar: Maarten Janssen

Micro Theory Seminar with Maarten Janssen (University of Vienna)

Event details
What
  • Micro Theory Seminar
When May 24, 2017
from 16:30 to 17:45
Where Faculty Room
Contact Name Stephan Lauermann
Contact Email
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Topic

Wholesale Price Discrimination and Recommended Retail Prices

 

Abstract

 

This paper shows that legislation which requires recommended retail prices to attract some positive share of sales may act as a commitment device and enable a monopolist manufacturer to efficiently engage in wholesale price discrimination. By creating asymmetries between retailers, where ex-ante there are none, a manufacturer indirectly screens searching consumers. Under wholesale price discrimination, endogenously created low cost retailers sell to a disproportionate share of low search cost consumers, which gives these retailers stronger incentives to compete, resulting in lower retail margins. Moreover, even endogenously created high cost retailers have an incentive to compete more severely given that their competitors have lower prices. We show that under such a discriminatory pricing scheme the average wholesale and retail prices increase, leading to higher manufacturer profits, but lower consumer welfare (and retail profits). We also show that without legislation requiring positive sales at the recommended retail prices, wholesale price discrimination is not possible as the manufacturer would be better off ”secretly” giving all retailers the lower wholesale prices. Thus, the paper shows that consumers are better off (and total surplus would be higher) without the legislation aiming to protect them.

 

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