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

Author

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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. Alexandre Cornière & Greg Taylor, 2014. "Integration and search engine bias," RAND Journal of Economics, RAND Corporation, vol. 45(3), pages 576-597, September.
    2. Hunold, Matthias & Kesler, Reinhold & Laitenberger, Ulrich & Schlütter, Frank, 2018. "Evaluation of best price clauses in online hotel bookings," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 542-571.
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    7. 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.
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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.

    More about this item

    Keywords

    Intermediaries; Platforms; Advice; Price parity;

    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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