Vertical Bargaining and Obfuscation
Firms often take actions that make it more difficult for consumers to gather information about the prices of products. These practices are widespread in many markets—by both the retailers that sell directly to consumers and, often, by product manufacturers. For instance, manufacturers can obscure prices by imposing different restrictions that limit the information about prices available to consumers or by producing several similar models of their products.
We analyze price obscuring practices in markets where a manufacturer sells through retailers. We show that these practices will arise only when retailers have some bargaining power. When the bargaining power lies entirely with the manufacturer, obscuring prices does not occur. This does not imply that consumers are better off, however, because the manufacturer acts as a monopolist and charges monopoly prices to its retailers, which then charge monopoly prices to their consumers.
Our findings suggest that regulators should consider the market structure when designing consumer protection policies. For instance, we find that policies that try to limit price obscuring practices may backfire in vertical markets. In addition to the desired effect of making prices more transparent, they also have an undesired effect of encouraging higher wholesale prices. Our findings recommend that policies imposing caps on wholesale prices may be more effective.