Vincenzo Denicolò University of Bologna and CEPR Wide or narrow MFN? Vincenzo Denicolò University of Bologna and CEPR

Setting n suppliers (i = 1,2,…,n) sell to final consumers either directly (pid) or through m retailers (j = 1,2,…,m) (pij) Retailers choose a revenue share (or a per-unit transaction fee); suppliers set final prices Retailers may or may not impose price parity clauses A parity clause requires suppliers not to discriminate across different distribution channels Wide parity retailer j requires that the final price for any distribution channel not be lower than pij Narrow parity pid cannot be lower than pij

Wide parity A literature which includes Johnson (REStud, 2017), Foros, Kind and Shaffer (RAND, 2017) and Boik and Corts (JLE 2016) has highlighted some possible anticompetitive effects of wide parity clauses Retailers’ revenue shares and profits increase Final prices increase Entry by small retailers may be impeded

Boik and Corts One supplier, two retailers No direct sales, no rebates Per unit fee (not revenue share) With (wide) parity clauses, a retailer’s fee is transferred onto the final price at a lower rate than in the absence thereof; hence, retailers’ perceived demand is less elastic However, retailers’ profit can be lower because final price may be excessive from the viewpoint of joint profit maximization, due to a problem of double marginalization Effects on entry are subtler can be negative if entrant if sufficiently (horizontally) differentiated from incumbent

Johnson and Foros et al. Allow for many suppliers Consider revenue sharing tariffs Zang and Wright (RAND 2017) argue that ad valorem tariffs dominate specific tariffs in this setting Main focus is on the adoption of the agency model instead of the traditional wholesale model Argue that parity clauses may facilitate the adoption of the agency model This may lead to higher final prices, even in the absence of the effect on the retailers’ margin discussed above

Johansen and Vergé (2016) Allow for direct sales and de-listing Assume tariffs offered by retailers are secret Show that narrow parity clauses have the same effects as wide clauses However, parity clauses may generate Pareto improvements if competition among suppliers is very intense retailers’ and suppliers’ profits may increases, and also consumer’s surplus may increases Intuition for this result not totally clear but hinges on the possibility of delisting May depend on the assumption that not only retailers’ tariffs, but also delisting decisions are secret However, authors argue that it does not, and changing this assumption would strengthen their results

Pro-competitive effects? The papers discussed so far do not account for consumer search, or for services offered by retailers on which suppliers could possibly free ride They focus only on the effect of parity clauses on pricing decisions Accounting for search and service provision may allow to address some of the possible pro-competitive effects of parity clauses It has indeed been argues that parity clauses may prevent sellers from free riding on services offered by retailers, which consumers use just as showrooms Similar to RPM

Pro-competitive effects? Yet, the search for pro-competitive effects along these lines has proved rather elusive Ronayne (mimeo, 2015) provides a basic framework to address the role of retailers (web platforms) in facilitating search Without a platform, consumers can observe only q < n prices, with the platform they observe all n prices His model does not feature price parity clauses, so its relevance to the policy debate is only indirect However, Ronyane shows that the fees charged by retailers harm consumers more than they benefit from the lower search cost, both directly and indirectly, via the increased competition among suppliers The result holds under a monopolistic retailer, and also with competing retailers Consumers gain only if competition among platforms is sufficiently strong What matters is how many platforms each consumer visits, not how many are available

Edelman and Wright Edelman and Wright (QJE 2015) develop a model where retailers do not facilitate search, but offer services that increase the value of the good for final consumers In the baseline model, there are many suppliers and a monopoly retailer Only narrow parity relevant in this case With parity clauses in place, there is excessive intermediation and over-provision of the service Thus, parity clauses harm final consumers Competition among retailers does not improve matters: the negative effects persist and may even grow as the number of retailers increases

Wand and Wright Wang and Wright (2016a,b) develop models in which platforms can make various types of investments: Investments that reduce search cost Investment that increase consumers’ awareness of the existence of platforms Investments that increase the value of the transaction for consumers In all cases, without parity clauses there is under-investment because of free riding (either by suppliers or by competing platforms) However, in all cases there is over-investment with parity clauses Intuitively, parity clauses allow platforms not only to capture the direct benefits of investment, but also to steal profits from suppliers (which compete more fiercely) The overall effect of parity clauses on social welfare is ambiguous However, the effect of wide parity on consumers’ surplus is generally negative in some cases , though, consumers may benefit from narrow parity; for example, when narrow parity makes competition viable

Circumventing narrow parity/1 Wals and Shinken (2017) argue that platforms may combine narrow parity with Best Price Guarantee (BPG) clauses In the Wang and Wright (2016a) model, that would imply that narrow parity always decreases consumers welfare

Non-linear pricing The literature assumes that retailers charge an ad valorem tariff at a constant rate, or a constant per unit fee With non-linear tariffs, the double marginalization problem may not arise The effects of parity clauses on pricing decisions might be less negative However, it seems that in practice retailers do not rely on fixed fees only

Market-specific effects? Certain markets where parity clauses are often applied exhibit specific features that may affect the effects of such clauses For example Hotels, flights: suppliers are typically capacity constrained; consumers may make advanced reservations at any time up to the time of delivery, which makes the pricing problem dynamic in a non-trivial way Car insurance: total demand is fixed (at least in the short run)

Circumventing narrow parity/2 Several antitrust authorities seemed to support a policy of prohibiting wide parity while permitting narrow parity However, there might be a practical issue here A supplier (or a group of suppliers) could circumvent narrow parity by creating their own platform, which would not be bound by narrow parity Consumers who visit the supplier’s web site and try to make a purchase would be redirected to the suppliers’ platform If this is so, does it make sense to have a policy that prohibits wide but permits narrow parity?