Agency or Wholesale? The Role of Retail Pass-Through

Abstract

With the rapid growth of e-commerce, agency selling is currently gaining popularity among online retailers (e-tailers). Prior research implicitly abstracts away cross-brand pass-through under traditional wholesale selling (i.e., how the retail price of another brand adjusts to changes in a given brand's wholesale price) and suggests that a shift to agency selling benefits e-tailers but harms suppliers. As an important counterweight to this result, we discover that an e-tailer's choice regarding selling format is critically moderated by retail pass-through behavior. On the one hand, agency selling can improve channel efficiency compared to wholesale selling. On the other hand, the relative intensity of supplier competition between these two selling formats is ambiguous. We show that the existing result applies only for a nonnegative cross-brand pass-through rate (e.g., under linear demands); otherwise (e.g., under multiplicative or exponential demands), the opposite may hold. Interestingly, we find that the conflict over the preference of selling format may not arise, and that all channel members could be better off with wholesale selling. Compared to the case of Bertrand competition, the e-tailer is even more likely to adopt wholesale selling under Cournot competition. Finally, under agency selling with an endogenous commission fee, we advise caution regarding the seemingly innocuous normalization of suppliers' marginal costs. Surprisingly, suppliers may benefit from higher marginal costs. Overall, our findings not only shed light on the theory of agency selling but also provide a plausible explanation for the observation that wholesale selling continues to prevail in online markets.