policymakers demonstrate

220 Nikolaos Vettas
controls a complementary market (that is, the device). Second, a demand
feature is identified (loosely, that demand does not become too convex too
quickly – more formally that the elasticity of demand strictly decreases as quantity
increases, up to the point where marginal revenue reaches zero) as the key
for the pricing comparison. The basis for the first main result is that, when
the good can be consumed without using the essential device (or equivalently
when there is competition among substitute devices), there is double marginalization
under both forms of pricing. Moreover, the authors’ model shows that
an increase in e-book prices can be explained by heightened competition for
reading devices. Depending on the shape of demand, final prices under wholesale
may be higher than under agency.
Condorelli et al. (2013) also study alternative pricing terms when the downstream
firm has more information about the final demand than the upstream
firm. The analysis provides a justification for the prevalence of the agency
model in online markets. In the model, a seller has an object for sale and can
reach buyers only through intermediaries, who also have private information
about buyers’ valuations. Intermediaries can either mediate the transaction by
buying the object and reselling it, or refer buyers to the seller and release information
for a fee, the agency model. The merchant model suffers from double
marginalization. The agency model suffers from adverse selection, since intermediaries
would like to refer low-value buyers, but retain high-value ones and
make profits from resale. In equilibrium, intermediaries specialize in agency.
Joint profits equal the seller’s profits when he has access to all buyers and all
intermediaries’ information and the division of profits depends on seller’s and
intermediaries’ relative bargaining power.
Kwark et al. (2015) demonstrate that the choice of pricing model, wholesale
or agency, can serve as a strategic tool for online retailers, allowing them to
benefit from third-party information, such as product reviews posted online
and used by consumers to help them make more informed decisions. Consumers
collect third-party information both regarding the quality of products
and regarding the extent to which products are fit for their individual needs
and tastes. When product quality is more important than fit to particular consumer
tastes, reliable third-party information regarding product quality intensifies
upstream competition. When upstream competition is strong, retailers benefit
from the wholesale model of pricing. Conversely, when product fitness is
relatively more important than quality, third-party information regarding product
fitness heterogenizes consumers’ estimated fit to the products, thus softening
upstream competition. Under such circumstances, retailers benefit from
agency pricing.
Lu (2015) compares the wholesale and the agency pricing models in the setup
of a bilateral duopoly with differentiation at both the upstream and the downstream
level. The author finds that suppliers benefit from the wholesale model