Salience in Retailing: Vertical Restraints on Internet Sales

Fabian Herweg () and Magdalena Helfrich

No 11948, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We provide an explanation for a frequently observed vertical restraint in e-commerce, namely that brand manufacturers partially or completely prohibit that retailers distribute their high-quality products over the internet. Our analysis is based on the assumption that a consumer's purchasing decision is distorted by salient thinking, i.e. by the fact that he overvalues a product attribute -- quality or price -- that stands out in a particular choice situation. In a highly competitive low-price environment like on an online platform, consumers focus more on price rather than quality. Especially if the market power of local (physical) retailers is low, price tends to be salient also in the local store, which is unfavorable for the high-quality product and limits the wholesale price a brand manufacturer can charge. If, however, the branded product is not available online, a retailer can charge a significant markup on the high-quality good. As the markup is higher if quality rather than price is salient in the store, this aligns the retailer's incentives with the brand manufacturer's interest to make quality the salient attribute and allows the manufacturer to charge a higher wholesale price. We also show that, the weaker are consumers' preferences for purchasing in the physical store and the stronger their salience bias, the more likely it is that a brand manufacturer wants to restrict online sales. Moreover, we find that a ban on distribution systems that prohibit internet sales increases consumer welfare and total welfare, because it leads to lower prices for final consumers and prevents inefficient online sales.

Keywords: Internet competition; Relative thinking; Retailing; Salience; Selective distribution; Vertical restraints (search for similar items in EconPapers)
JEL-codes: D43 K21 L42 (search for similar items in EconPapers)
Date: 2017-03
New Economics Papers: this item is included in nep-com, nep-ict, nep-ipr, nep-mkt and nep-pay
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://cepr.org/publications/DP11948 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Salience in Retailing: Vertical Restraints on Internet Sales (2017)
Working Paper: Salience in Retailing: Vertical Restraints on Internet Sales (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:11948

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP11948

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().