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.
Prof. Dr. Franz Wirl (Universität Wien)