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Context-dependent preferences and retailing: Vertical restraints on internet sales

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  • Helfrich, Magdalena
  • Herweg, Fabian

Abstract

We provide an explanation for a frequently observed vertical restraint in e-commerce, namely that brand manufacturers partially or completely prohibit that retailers distribute their high-quality products over the internet. We assume that a consumer has context-dependent preferences in the sense that he overvalues a product attribute – quality or price – that stands out in the choice set. Our analysis reveals the following: If online competition determines the margin a retailer can charge at his brick-and-mortar store, he has no incentive to draw consumers’ attention to a product’s high quality. If however, the high-quality branded good is not available online, a retailer can charge a significant markup on it and this markup is higher if consumers focus on quality rather than price. Thus, a ban on online sales aligns a retailer’s incentive with the brand manufacturer’s interest to highlight its relative advantage, quality, and allows the manufacturer to charge a higher wholesale price. Consumer welfare and total welfare, however, are higher if distribution systems that prohibit internet sales are forbidden.

Suggested Citation

  • Helfrich, Magdalena & Herweg, Fabian, 2020. "Context-dependent preferences and retailing: Vertical restraints on internet sales," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 87(C).
  • Handle: RePEc:eee:soceco:v:87:y:2020:i:c:s2214804319306299
    DOI: 10.1016/j.socec.2020.101556
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    References listed on IDEAS

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    Keywords

    Context-dependent preferences; Decoy good; Internet competition; Relative thinking; Retailing; Selective distribution;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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