Alexander Senk, Leibniz University Hannover

“Consumer captivity and the profitability of unauthorized resale”

This paper studies how the presence of captive consumers, who buy exclusively through a manufacturer's authorized sales channel, affects the profitability of unauthorized resale. I consider a model in which a manufacturer sells a good in two markets at different prices. This price difference creates an arbitrage opportunity for a reseller, who can buy the good in the low-price market and resell it in the high-price market. I show that the reseller's profit may increase with the share of captive consumers, although its potential customer base declines. This is because a higher degree of consumer captivity enables the manufacturer to sustain larger price differences between the markets, thereby increasing the reseller's margin. Hence, an implication of the paper is that measures aimed at increasing consumer captivity can have the unintended effect of making unauthorized resale more profitable.

Contact person: Johan Lagerlöf