Research Talk: Julian Wright
Speaker: Julian Wright, National University of Singapore
Title: "Competition through commissions when firms can free ride on advice" (joint work with Bo Shen)
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 firms to free ride on the intermediary’s advice—discounting 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 markets such as those involving insurance, financial and medical products, firms actually often do not discount for direct sales, even though the intermediary does not impose any restriction on their pricing. Indeed, firms sometimes choose not to sell directly at all. We also explain why in other market settings such as online marketplaces and booking platforms, free-riding on the intermediary’s advice occurs, and why the intermediary may impose price parity restrictions to prevent it.