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Free Riding and Sales Strategies for the Internet

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  • Dennis W. Carlton
  • Judith A. Chevalier

Abstract

We examine manufacturers' decisions of whether and how to offer their products for sale over the internet. Manufacturers that rely on promotion of their products by brick and mortar retailers must consider the possibility that internet retailers can free ride off of that promotional effort. This creates an incentive for manufacturers to limit the availability of their products over the internet and to control the pricing of their products over the internet. We examine three categories of products: fragrances, DVD players, and side by side refrigerators. Our evidence suggests that manufacturers that limit distribution in the physical world also use various mechanisms to limit distribution online. In particular, we find evidence that these manufacturers attempt to prevent the sale of their products by online retailers who sell goods at deep discounts. Furthermore, we show that manufacturers who distribute their goods directly through manufacturer websites tend to charge very high prices for the products, consistent with the hypothesis that manufacturers internalize free rider issues. While our main focus is on free riding, our evidence on pricing practices is germane to the growing literature on price dispersion on the internet.

Suggested Citation

  • Dennis W. Carlton & Judith A. Chevalier, 2001. "Free Riding and Sales Strategies for the Internet," NBER Working Papers 8067, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8067
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    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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