Direct-to-Consumer Sales by Manufacturers and Bargaining

43 Pages Posted: 10 Feb 2021

See all articles by Javier D. Donna

Javier D. Donna

University of Florida

Pedro Pereira

Autoridade da Concorrência

Andre Trindade

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Renan C. Yoshida

Stanford University - Department of Economics

Date Written: February 5, 2021

Abstract

Cutting out the intermediary and selling directly to consumers is an increasingly common strategy by manufacturers in many industries. We develop a structural model of vertical relations where manufacturers both bargain with retailers over wholesale prices and sell their products directly to consumers. We show that direct sales by manufacturers generate two effects that have opposing impact on welfare. First, direct sales generate potential welfare gains to consumers downstream due to additional competition and product variety. Second, in the upstream, there is an increase in the bargaining leverage of the manufacturers selling directly to consumers. Negotiated wholesale prices increase, thus increasing final prices to consumers and decreasing consumer welfare. We show how our model can be used to quantify the bargaining leverage and welfare effects of direct sales. We estimate our model using data from the outdoor advertising industry and use the estimated model to simulate counterfactual scenarios to isolate these effects. We conclude by discussing the relevance of the bargaining leverage effect for vertical merger evaluation.

Keywords: Direct-to-consumer sales, bargaining, vertical mergers, advertising

JEL Classification: D43, L13, L42, L51, L81, M37

Suggested Citation

Donna, Javier D. and Pereira, Pedro and Trindade, Andre and Yoshida, Renan, Direct-to-Consumer Sales by Manufacturers and Bargaining (February 5, 2021). Available at SSRN: https://ssrn.com/abstract=3779962 or http://dx.doi.org/10.2139/ssrn.3779962

Javier D. Donna (Contact Author)

University of Florida ( email )

Gainesville, FL 32606
United States

HOME PAGE: http://www.jdonna.org/

Pedro Pereira

Autoridade da Concorrência ( email )

1050-138 Lisboa
Portugal

Andre Trindade

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

HOME PAGE: http://https://sites.google.com/site/andretrindade/

Renan Yoshida

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
STANFORD, CA 94305-6072
United States

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