Beliefs and consumer search in a vertical industry

Janssen, Maarten; Shelegia, Sandro

Beliefs and consumer search in a vertical industry

License

Citation

Janssen, M, Shelegia, S. Beliefs and consumer search in a vertical industry. 2018. handle: http://hdl.handle.net/10230/44725

This citation was generated automatically.

Abstract

This paper studies vertical relations in a search market. As the wholesale arrangement between a manufacturer and its retailers is typically unobserved by consumers, their beliefs about who is to be blamed for a price deviation play a crucial role in determining wholesale and retail prices. The common assumption in the consumer search literature is that consumers exclusively blame an individual retailer for a price deviation. We show that in the vertical relations context, predictions based on this assumption are not robust in the sense that if consumers assign just a small probability to the event that the upstream manufacturer is responsible for the deviation, equilibrium predictions are qualitatively dierent. For the robust beliefs, the vertical model can explain a variety of observations, such as retail price rigidity (or, alternatively, low cost pass-through), non-monotonicity of retail prices in search costs, and (seemingly) collusive retail behavior. The model can be used to study a monopoly online platform that sells access to final consumers.