Cornell University - Samuel Curtis Johnson Graduate School of Management
January 10, 2014
I investigate the "agency model" of sales, in which suppliers set retail prices and share revenue with retailers. Perhaps surprisingly, it is not the case that the agency model eliminates double markups; retailers continue to impose a markup because the revenue-sharing contracts they select distort the perceived marginal cost of suppliers. Nonetheless, when retailers compete in revenue shares, adopting the agency model lowers retail prices and industry profits. Yet, retailers' profits increase. Most-favored nation clauses that stipulate retail price parity can facilitate the emergence of high industry prices, but in some cases may also raise market-entry incentives and benefit consumers. My results provide an explanation for why many online retailers have adopted the agency model and MFN clauses.