Wholesale Versus Retail Pricing with Downstream Firms ('Amazon' and 'Apple') that Add Value and Have First Mover Advantage

This paper compares wholesale with retail pricing between Bertrand competing retailers and an upstream oligopoly accounting for: retailers play a significant role, have a strategic (first mover) advantage, and a mixed outcome - one retailer opts for wholesale the other for retail pricing - within a symmetric setup. This investigation is motivated by Apple's entry into the e-book market and its choice of the agency model, i.e., retail pricing with a share going to Apple. Apple's choice is surprising: (i) retail pricing allows the upstream firms to collect all rents in a simultaneous move game; (ii) the incumbent, Amazon used wholesale pricing arrangements. It turns out both, retailers' contributions and their strategic advantage are necessary to explain Apple's move.