Selling Through Referrals
47 Pages Posted: 6 May 2013
Date Written: May 2013
A seller has an object for sale and can reach buyers only through intermediaries, who also have privileged information about buyers’ valuations. Intermediaries can either mediate the transaction by buying the object and reselling it–the merchant model–or refer buyers to the seller and release information for a fee–the agency model. The merchant model suﬀers from double marginalization. The agency model suﬀers from adverse selection: Intermediaries would like to refer low-value buyers, but retain high-value ones and make proﬁts from resale. We show that, in equilibrium, intermediaries specialize in agency. Seller’s and intermediaries’ joint proﬁts equal the seller’s proﬁts when he has access to all buyers and all intermediaries’ information. Proﬁts’ division depends on seller’s and intermediaries’ relative bargaining power. Our results rationalize the prevalence of the agency model in online markets.
Keywords: asymmetric information, intermediation, agency, resale markets, referrals
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