Friday, September 28, 2018

Measuring the Welfare of Intermediation in Vertical Markets

Javier D. Donna (The Ohio State University); Pedro Pereira; Tiago Pires (Department of Economics, University of North Carolina); André Trindade (FGV EPGE Brazilian School of Economics and Finance) are Measuring the Welfare of Intermediation in Vertical Markets.

ABSTRACT: We empirically investigate the welfare implications of intermediaries in oligopolistic markets, where intermediaries offer additional services to differentiate their products from the ones of the manufacturers. Our identification strategy exploits the unique circumstance that, in the outdoors advertising industry, there are two distribution channels: consumers can purchase the product either directly from manufacturers, or through intermediaries. We specify a differentiated products’ equilibrium model, and estimate it using product-level data for the whole industry. On the demand side, the model includes consumers who engage in costly search with preferences that are specific to the distribution channel. On the supply side, the model includes two competing distribution channels. One features two layers of activity, where manufacturers and intermediaries bargain over wholesale prices, and intermediaries compete on final prices to consumers. The other is vertically integrated. The estimated model is sed to simulate counterfactual scenarios, where intermediaries do not offer additional services. We find that the presence of intermediaries increases welfare because the value of their services outweighs the additional margin charged.

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