Retailer access pricing and supplier relations in the agency model

Abstract

In vertical relations where a retailer enters into agency contracts with multiple heterogenous suppliers of unrelated products, I show the retailer can turn the products into complements or substitutes by charging or subsidizing consumers for access. The optimal access price depends critically on the revenue share that the retailer takes from each supplier, and the retailer's cross-price elasticity with respect to each supplier's price. When firms price simultaneously, the retailer optimally subsidizes consumer access if and only if the aggregate of these two factors across all suppliers exceeds 1. When the retailer prices before suppliers, it benefits from an additional demand amplification effect: The retailer can use the access price to manipulate suppliers' best responses such that they always lead to demand surges across the whole network of suppliers, which then benefits the retailer through revenue sharing. Under different circumstances, the retailer may achieve this through either further raising a positive access price, or further reducing a negative access price.