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The Agency Model and MFN Clauses

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  • Justin P. Johnson

Abstract

I provide an analysis of vertical relations in markets with imperfect competition at both layers of the supply chain and where exchange is intermediated either with wholesale prices or revenue-sharing contracts. Revenue-sharing is extremely attractive to firms that are able to set the revenue shares but often makes the firms that set retail prices worse off. This is so whether revenue-sharing lowers or raises industry profits. These results are strengthened when a market moves from “the wholesale model” of sales to “the agency model” of sales, which results in retailers setting revenue shares and suppliers setting retail prices. I also show that retail price-parity restrictions raise industry prices. These results provide a potential explanation for why many online retailers have adopted the agency model and retail price-parity clauses.

Suggested Citation

  • Justin P. Johnson, 2017. "The Agency Model and MFN Clauses," Review of Economic Studies, Oxford University Press, vol. 84(3), pages 1151-1185.
  • Handle: RePEc:oup:restud:v:84:y:2017:i:3:p:1151-1185.
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    File URL: http://hdl.handle.net/10.1093/restud/rdx007
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