When Prohibiting Platform Parity Agreements Harms Consumers

Abstract

We consider a three-level supply chain where a monopolistic seller distributes its product both directly through its own distribution channel and indirectly through platforms accessed by intermediaries competing for final consumers. In this setting, we examine the welfare effects of platform parity agreements, namely contractual provisions according to which the seller cannot charge different prices for the same product distributed through different platforms. We find that these agreements mitigate the marginalization problem both in a wholesale and an agency model. However, only in the former model platform parity unambiguously increases consumer surplus; in the latter, it also increases the commissions paid by the monopolist to the platforms, whereby exacerbating the marginalization problem. On the net, platform parity benefits consumers in the agency model when competition between direct and indirect distribution is sufficiently intense. Interestingly, in both models consumers' preferences are always aligned with the platforms' but not with the seller's.

Keywords: Agency Model, Distribution Channels, Platform Parity Agreements, Wholesale Model

JEL Classification: L42, L50, L81