Maarten Janssen, University of Vienna

"Retail Discrimination and Consumer Search"

Abstract

This paper analyses the incentives of manufacturers to discriminate between ex ante symmetric retailers competing for consumers with different search cost. By discriminating, a manufacturer indirectly screens searching consumers. Expecting price dispersion in the retail market, but (before searching) not knowing which retailers have lower prices, consumers  with lower search costs continue searching when they encounter a higher retail price at their first search. Search creates more retail competition, increasing the manufacturer profits, as low-cost retailers sell to a disproportionate share of low search cost consumers, providing strong incentives to compete, while high-cost retailers also lower margins given their smaller customer base. Despite lower retail margins, consumers are worse off as the manufacturer sets higher wholesale prices under price discrimination.

Contact person: Egor Starkov