Selling Through Referrals

17 Pages Posted: 29 Oct 2018

See all articles by Daniele Condorelli

Daniele Condorelli

University of Warwick - Department of Economics

Andrea Galeotti

University of Essex

Vasiliki Skreta

University of Texas at Austin - Department of Economics; University College London

Date Written: Winter 2018

Abstract

We endogenize intermediaries' choice to operate as agents or merchants in a market where there are frictions due to asymmetric information about consumption values. A seller has an object for sale and can reach buyers only through intermediaries. Intermediaries can either mediate the transaction by buying and reselling—the merchant mode—or refer buyers to the seller for a fee—the referral mode. When the seller has a strong bargaining position and can condition the asking price to the intermediaries' business model choice, all intermediaries specialize in agency. The seller's and intermediaries' joint profits equal the seller's profits when he has access to all buyers. When the seller does not have such bargaining power, the level of the referral fee and the degree of competition among intermediaries determine the business mode adoption. A hybrid agency–merchant mode may be adopted in equilibrium. Banning the referral mode can decrease welfare because the merchant mode is associated with additional allocative distortions due to asymmetric information.

Suggested Citation

Condorelli, Daniele and Galeotti, Andrea and Skreta, Vasiliki, Selling Through Referrals (Winter 2018). Journal of Economics & Management Strategy, Vol. 27, Issue 4, pp. 669-685, 2018, Available at SSRN: https://ssrn.com/abstract=3273538 or http://dx.doi.org/10.1111/jems.12251

Daniele Condorelli (Contact Author)

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom

Andrea Galeotti

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Vasiliki Skreta

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

HOME PAGE: http://vskreta.wixsite.com/vskreta

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

HOME PAGE: http://vskreta.wixsite.com/vskreta

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