Wednesday, February 20, 2019

Who Benefits From Banning Discriminatory Wholesale Pricing When Retailers Can Price Match?

Arcan Nalca, Smith School of Businessand Gangshu (George) Cai, Santa Clara University ask Who Benefits From Banning Discriminatory Wholesale Pricing When Retailers Can Price Match?

ABSTRACT: In this paper, we identify the impact of retailers’ price-matching guarantees on supply chain efficiency and consumer welfare by taking the manufacturer’s pricing decision into consideration. Specifically, we investigate the interaction between retailers’ price-matching guarantees and manufacturer’s discriminatory wholesale pricing.

We show that, in the presence of a regulation against discriminatory wholesale pricing regime, retailers tacitly collude by offering the price-matching guarantee. However, the collusive role of price-matching guarantees subsides if the manufacturer is allowed to follow a discriminatory wholesale pricing regime. Therefore, a ban on wholesale price discrimination (e.g., the Robinson- Patman Act) in an industry where retailers can offer price-matching guarantees reduces supply chain efficiency, consumer welfare, and consumer surplus. As such, we find wholesale price discrimination to be welfare improving. These findings complement the extant literature, which shows that (i) banning wholesale price discrimination can be welfare improving in the absence of price-matching guarantees, and (ii) price-matching guarantees allow retailers to collude when the wholesale prices are exogenously set. Moreover, the negative impact of price-matching guarantees arising from banning wholesale price discrimination grows stronger with retailer asymmetry, and is more likely to happen if retailers are asymmetric in terms of operational rather than market efficiency. In the presence of a regulation against discriminatory wholesale pricing under retailer asymmetry, there exists a Pareto zone such that all firms prefer that only one of the two retailers offer a price-matching guarantee. Our results are robust with respect to customer heterogeneity on price-matching information.

https://lawprofessors.typepad.com/antitrustprof_blog/2019/02/who-benefits-from-banning-discriminatory-wholesale-pricing-when-retailers-can-price-match.html

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