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Why (don’t) firms free ride on an intermediary’s advice?

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  • Shen, Bo
  • Wright, Julian

Abstract

When consumers rely on an intermediary’s advice about which firm to buy from but can switch to buying directly after receiving advice, one might expect firms to discount their direct prices to encourage consumers to purchase directly after obtaining advice, thereby avoiding paying commissions. We provide a theory which can explain why firms often do not free ride in this way, as well as when they do. The theory can explain why online marketplaces and hotel booking platforms impose price-parity clauses to prevent such free riding, while insurance and financial advisors do not.

Suggested Citation

  • Shen, Bo & Wright, Julian, 2019. "Why (don’t) firms free ride on an intermediary’s advice?," International Journal of Industrial Organization, Elsevier, vol. 64(C), pages 27-54.
    • Handle: RePEc:eee:indorg:v:64:y:2019:i:c:p:27-54
    DOI: 10.1016/j.ijindorg.2018.05.005
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    References listed on IDEAS

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    1. Galeotti, Andrea & Moraga-González, José Luis, 2009. "Platform intermediation in a market for differentiated products," European Economic Review, Elsevier, vol. 53(4), pages 417-428, May.
    2. Inderst, Roman & Ottaviani, Marco, 2012. "How (not) to pay for advice: A framework for consumer financial protection," Journal of Financial Economics, Elsevier, vol. 105(2), pages 393-411.
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    10. Hunold, Matthias & Kesler, Reinhold & Laitenberger, Ulrich & Schlütter, Frank, 2017. "Evaluation of best price clauses in hotel booking," ZEW Discussion Papers 16-066, ZEW - Leibniz Centre for European Economic Research, revised 2017.
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    14. Roman Inderst & Marco Ottaviani, 2012. "Competition through Commissions and Kickbacks," American Economic Review, American Economic Association, vol. 102(2), pages 780-809, April.
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    Cited by:

    1. Michele Bisceglia & Jorge Padilla & Salvatore Piccolo, 2019. "When Prohibiting Platform Parity Agreements Harms Consumers," CSEF Working Papers 542, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    2. Matthias Hunold & Ulrich Laitenberger & Guillaume Thébaudin, 2022. "Bye-box: An Analysis of Non-Promotion on the Amazon Marketplace 03.06.2022," Working Papers hal-04104183, HAL.
    3. Bisceglia, Michele & Padilla, Jorge & Piccolo, Salvatore, 2021. "When prohibiting wholesale price-parity agreements may harm consumers," International Journal of Industrial Organization, Elsevier, vol. 76(C).
    4. Zongrun Wang & Mei Yang, 2020. "Effective allocation of financial services intensity and its impact on channel competition," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(8), pages 1473-1492, December.

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    More about this item

    Keywords

    Intermediaries; Platforms; Advice; Price parity;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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