The Double Diamond Paradox
American Economic Journal: Microeconomics
vol. 9,
no. 3, August 2017
(pp. 63-99)
Abstract
We study vertical relations in markets with consumer and retailer search. We obtain three important new results. First, we provide a novel explanation for price dispersion that does not depend on some form of heterogeneity among consumers. Price dispersion takes on the form of a bimodal distribution. Second, under competitive conditions (many retailers or small consumer search cost), social welfare is significantly smaller than in the double marginalization outcome. Manufacturers' regular price is significantly above the monopoly price, squeezing retailers' markups and providing an alternative explanation for incomplete cost pass-through. Third, firms' prices are decreasing in consumer search cost.Citation
Garcia, Daniel, Jun Honda, and Maarten Janssen. 2017. "The Double Diamond Paradox." American Economic Journal: Microeconomics, 9 (3): 63-99. DOI: 10.1257/mic.20150299Additional Materials
JEL Classification
- D11 Consumer Economics: Theory
- D21 Firm Behavior: Theory
- D43 Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- L13 Oligopoly and Other Imperfect Markets
- L60 Industry Studies: Manufacturing: General
- L81 Retail and Wholesale Trade; e-Commerce
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