Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 7/18: When is Double Marginalization a Problem?

Tommy Staahl Gabrielsen (), Bjørn Olav Johansen () and Greg Shaffer ()
Additional contact information
Tommy Staahl Gabrielsen: University of Bergen, Department of Economics, Postal: Institutt for økonomi, Universitetet i Bergen, Postboks 7802, 5020 Bergen, Norway
Bjørn Olav Johansen: University of Bergen, Department of Economics, Postal: Institutt for økonomi, Universitetet i Bergen, Postboks 7802, 5020 Bergen, Norway
Greg Shaffer: University of Rochester

Abstract: Double marginalization refers to the distortion caused by the successive markups of independent firms in a distribution channel. The implication that this both reduces firm profits and harms consumers is known as the double-marginalization problem. Many solutions have been proposed to help sellers mitigate this pricing problem, and it is arguably one of the main reasons why quantity discounts in the distribution channel are as prevalent as they are. Surprisingly, however, the implication that end-user prices will be distorted upward has only been shown under a very restrictive set of circumstances (successive monopoly). Whether and under what conditions double marginalization is a problem in other, more realistic settings is generally unknown. In this paper, we show that double marginalization need not be a problem when an upstream firm sells its product through competing intermediaries and shelf space is costly. When this is the case, we find that there will often be a role for slotting fees, minimum resale price maintenance (min RPM), and minimum advertised pricing (MAP) policies.

Keywords: slotting fees; resale price maintenance; distribution channels

JEL-codes: L11; L42

30 pages, August 31, 2018

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