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When is Double Marginalization a Problem?

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Double marginalization refers to the distortion caused by the successive markups of independent firms in a distribution channel. The implication that this both reduces firm profits and harms consumers is known as the double-marginalization problem. Many solutions have been proposed to help sellers mitigate this pricing problem, and it is arguably one of the main reasons why quantity discounts in the distribution channel are as prevalent as they are. Surprisingly, however, the implication that end-user prices will be distorted upward has only been shown under a very restrictive set of circumstances (successive monopoly). Whether and under what conditions double marginalization is a problem in other, more realistic settings is generally unknown. In this paper, we show that double marginalization need not be a problem when an upstream firm sells its product through competing intermediaries and shelf space is costly. When this is the case, we find that there will often be a role for slotting fees, minimum resale price maintenance (min RPM), and minimum advertised pricing (MAP) policies.

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  • Staahl Gabrielsen, Tommy & Johansen, Bjørn Olav & Shaffer, Greg, 2018. "When is Double Marginalization a Problem?," Working Papers in Economics 7/18, University of Bergen, Department of Economics.
    • Handle: RePEc:hhs:bergec:2018_007
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    Cited by:

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    More about this item

    Keywords

    slotting fees; resale price maintenance; distribution channels;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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