Abstract
Abstract We study strategic interactions in markets in which firms sell to consumers both directly and via a competitive channel, such as a price comparison website or marketplace, where multiple sellers’ offers are visible at once. We ask how a competitive channel’s size influences market outcomes when some consumers have limited price information. A bigger competitive channel means that more consumers compare prices, increasing within-channel competition. However, we show that such seemingly pro-competitive developments can raise prices and harm consumers by weakening between-channel competition.
Highlights
Many goods and services can be purchased either through a seller’s direct channel, e.g., their own store or website, or through a competitive channel where multiple sellers’ prices can be considered simultaneously
We studied an environment in which selling occurs both directly and via a competitive sales channel (CC)
Our framework features a measure of each actor’s market power, or size, which is commensurate across types of actor, both sellers and competitive channel operators
Summary
Many goods and services can be purchased either through a seller’s direct channel, e.g., their own store or website, or through a competitive channel where multiple sellers’ prices. Shoppers buy through the competitive channel, while sellers set a high direct price to exploit their captive consumers. To avoid paying the high fee, sellers compete for shoppers via direct prices, undercutting the prices on the competitive channel. In this regime it is direct prices that are the lowest in the market. It eventually becomes so difficult for the CC to deter undercutting that it gives up and switches to the high-fee regime in which prices are higher, and focuses on selling to its own captive base This means that seemingly pro-competitive changes in market composition that result in more consumers comparing more prices (such as uninformed consumers becoming informed or adopting a price comparison technology) can increase prices, harming consumers. The rest of the paper proceeds as follows: Section 1.1 discusses related literature and documents our contribution, Section 2 introduces the model, Section 3 characterises equilibrium, Section 4 demonstrates the importance of market composition for equilibrium outcomes, Section 5.1 allows for the possibility of showrooming, Sections 5.2 and 5.3 allow for more general CC fee structures, and Section 6 concludes
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