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Consumer Search and Vertical Relations: The Triple Marginalization Problem

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This paper shows that the double marginalization problem signi cantly underestimates the ineciencies arising from vertical relations in markets where consumers who are uninformed about the wholesale arrangements be- tween manufacturers and retailers search for the best retail price. Consumer search provides manufacturers an additional incentive to substantially increase wholesale prices. Consequently, all market participants are worse o and we call this phenomenon the triple marginalization problem. We also show that, when the wholesale price is unknown, retail prices decrease and industry prof- its and consumer surplus increase in search cost, whereas the opposite is true when the wholesale price is known.

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File URL: http://homepage.univie.ac.at/Papers.Econ/RePEc/vie/viennp/vie1206.pdf
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Paper provided by University of Vienna, Department of Economics in its series Vienna Economics Papers with number 1206.

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Date of creation: Oct 2012
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Handle: RePEc:vie:viennp:1206

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Web page: http://www.univie.ac.at/vwl

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