Competing Sales Channels

We model strategic interactions in a market where producers sell to consumers directly as well as via a competitive channel (CC) such as a broker, online marketplace or price comparison website. We show how the size of the competitive channel can influence market outcomes. Equilibrium falls into one of two regimes: either the CC charges low commission and accommodates producers, or it charges high commission and faces strong competition from producers’ direct sales channel. Seemingly pro-competitive developments that increase the number of prices consumers check can raise prices and reduce consumer surplus. We extend the model to examine endogenously-determined compositions of market power between direct and competitive channels. We also use the model to study an active policy issue concerning which channels should be allowed to utilize data about past purchases.