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The Double Diamond Paradox

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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 significantly 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.

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  • Daniel Garcia & Jun Honda & Maarten Janssen, 2015. "The Double Diamond Paradox," Vienna Economics Papers vie1504, University of Vienna, Department of Economics.
    • Handle: RePEc:vie:viennp:vie1504
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    Cited by:

    1. Martin Obradovits & Philipp Plaickner, 2023. "Price-Directed Search, Product Differentiation and Competition," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 63(3), pages 317-348, November.
    2. Janssen, Maarten C.W., 2020. "Vertical contracts in search markets," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    3. Janssen, Maarten & Reshidi, Edona, 2022. "Regulating recommended retail prices," International Journal of Industrial Organization, Elsevier, vol. 85(C).
    4. Garrod, Luke & Olczak, Matthew & Wilson, Chris M., 2020. "Price advertising, double marginalisation and vertical restraints," Economics Letters, Elsevier, vol. 196(C).
    5. Maarten Janssen & Edona Reshidi, 2023. "Discriminatory Trade Promotions in Consumer Search Markets," Marketing Science, INFORMS, vol. 42(2), pages 401-422, March.
    6. Honda, Jun, 2015. "Intermediary Search for Suppliers in Procurement Auctions," Department of Economics Working Paper Series 203, WU Vienna University of Economics and Business.
    7. Edona Reshidi, 2022. "Vertical Bargaining and Obfuscation," Staff Working Papers 22-13, Bank of Canada.
    8. Sander Heinsalu, 2018. "Competitive pricing despite search costs if lower price signals quality," Papers 1806.00898, arXiv.org.
    9. Garcia, Daniel & Janssen, Maarten, 2018. "Retail channel management in consumer search markets," International Journal of Industrial Organization, Elsevier, vol. 58(C), pages 162-182.
    10. Obradovits, Martin, 2015. "Going to the Discounter: Consumer Search with Local Market Heterogeneities," MPRA Paper 66613, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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