The Agency Model and MFN Clauses

47 Pages Posted: 14 Feb 2013 Last revised: 3 Mar 2017

Justin P. Johnson

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: January 25, 2017

Abstract

I provide an analysis of vertical relations in markets with imperfect competition at both layers of the supply chain and where exchange is intermediated either with wholesale prices or revenue-sharing contracts. Revenue-sharing is extremely attractive to firms that are able to set the revenue shares but often makes the firms that set retail prices worse off. This is so whether revenue-sharing lowers or raises industry profits. These results are strengthened when a market moves from the "wholesale model" of sales to the "agency model" of sales, which results in retailers setting revenue shares and suppliers setting retail prices. I also show that retail price-parity restrictions raise industry prices. These results provide a potential explanation for why many online retailers have adopted the agency model and retail price-parity clauses.

Suggested Citation

Johnson, Justin P., The Agency Model and MFN Clauses (January 25, 2017). Available at SSRN: https://ssrn.com/abstract=2217849 or http://dx.doi.org/10.2139/ssrn.2217849

Justin P. Johnson (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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