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Percentage Retail Mark-Ups
Swiss Journal of Economics and Statistics
A common assumption in the literature on the double marginalization problem is that the retailer can set his mark-up only in the second stage of the game after the producer has moved. To the extent that the sequence of moves is designed to reflect the relative bargaining power of the two parties it is just as plausible to let the retailer move first. Furthermore, retailers frequently calculate their selling prices by adding a percentage mark-up to their wholesale prices. This allows a retailer to obtain higher profits than with a standard linear pricing policy. This result holds both for the case of simultaneous moves and when the retailer moves first. Under such a «percentage mark-up» strategy equilibrium prices are lower and aggregate producer-plus-retailer profits are higher than under linear pricing. This last result has implications for situations, where there is intense competition among retailers. In the absence of franchise fees (which are quite rarely observed in practice), producers may prefer working with retailers using percentage mark-ups.
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