ESMT Faculty Research Seminar by Julian Wright (National University of Singapore)
Topic:Competition through commissions in the face of showrooming
Abstract: Suppose firms that supply a product or service to consumers can pay commission fees (or kickbacks) to an intermediary that provides consumers with advice on which firm among multiple competing firms to buy from. When consumers rely on the intermediary's advice, but can switch to buying directly after receiving advice, one might expect a showrooming problem to arise, in which firms discount their direct prices to encourage consumers to purchase directly after obtaining advice, thereby avoiding paying commissions. We provide a theory which can explain why in some such markets (e.g. for certain insurance, financial and medical products) showrooming does not arise---firms do not discount for direct sales, even though the intermediary does not impose any restriction on their pricing. Indeed, we explain why firms may choose not to sell directly at all in such markets. We also explain why in other market settings intermediaries may need to rely on pricing restrictions to prevent showrooming and direct sales.