Why (don’t) firms free ride on an intermediary’s advice? |
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| Institution: | 1. Economics and Management School, Wuhan University, China;2. Department of Economics, National University of Singapore, Singapore;1. University of North Carolina, Department of Economics, Chapel Hill, NC 27599-3305, United States;2. Toulouse School of Economics, 21 allée de Brienne, 31015 Toulouse, Cedex 6, France;3. European Commission, DG Competition, Place Madou 1, 1210 Saint-Josse-ten-Noode, Belgium;1. Department of Economics, University of Melbourne, Level 4, FBE Building, 111 Barry Street, Victoria 3010, Australia;2. Fuqua School of Business, Duke University, 100 Fuqua Drive, Durham, NC 27708, USA |
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| Abstract: | When consumers rely on an intermediary’s advice about which firm to buy from but can switch to buying directly after receiving advice, one might expect firms to 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 firms often do not free ride in this way, as well as when they do. The theory can explain why online marketplaces and hotel booking platforms impose price-parity clauses to prevent such free riding, while insurance and financial advisors do not. |
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