Attention to online sales: The role of brand image concerns

Abstract

We provide a novel intuition for why manufacturers restrict their retailers' ability to resell brand products online. Our approach builds on models of salience‐driven attention according to which price disparities across distribution channels guide a consumer's attention toward prices and lower her appreciation for quality. Absent vertical restraints, therefore, one of two salience distortions—a quality or a participation distortion—can arise in equilibrium. We show that, by ruling out both distortions, vertical restraints on online sales can be socially desirable but can also hurt consumers through higher retail prices. We thereby identify a novel trade‐off between efficiency and consumer surplus.

Price promotions as a threat to brands

“…However, both of these articles focus on the effects of vertical restraints in online retailing. For example, Dertwinkel‐Kalt and Köster (2022) demonstrate that, in a setting where price differences across sales channels (offline and online) lead consumers to undervalue product quality, a monopolistic upstream manufacturer may find it optimal to bias product quality away from the (rational) first best to counteract the associated profit loss. Under some circumstances, vertical restraints can then correct market outcomes.…”

Salience and horizontal differentiation

“…Inderst and Obradovits (2020) argue for a different reason for inefficient quality choice: high hidden charges induce firms to lower their easily observed prices leading to low prices and therefore to price salience and lower incentives to invest in quality. Dertwinkel‐Kalt and Köster (2021) point at a possible distortion of efficient quality choice caused by online sales by making price salient and argue that a vertical restraint to limit online sales by retailers implemented by manufacturers can be welfare improving. A similar conclusion is achieved by Helfrich and Herweg (2020).…”

“…A similar conclusion is achieved by Helfrich and Herweg (2020). Dertwinkel‐Kalt and Köster (2021) apply both the salience model of Kőszegi and Szeidl (2013), which is based on the contrast effect, and the salience model of Bordalo et al (2013), whereas Helfrich and Herweg (2020) use a different formulation of context‐dependent preferences. For a detailed survey presenting the salience model and its recent applications, see Herweg et al (2018).…”

Excessive Competition on Headline Prices

“…(2016), Herweg et al. (2017), Helfrich and Herweg (2020), Apffelstaedt and Mechtenberg (2021), and Dertwinkel‐Kalt and Köster (2022). Notably, we share with the extant literature the result that such preferences can distort consumers' choices, prices, and ultimately firms' product choices.…”

“…(2016), depending on the specific technological relationship between product quality and the marginal costs of production, consumers' biased attention may induce “commoditized” price salient equilibria (where product quality is distorted downward relative to the rational benchmark, i.e., the first best) or “de‐commoditized” quality salient equilibria (where the opposite is true). In Dertwinkel‐Kalt and Köster (2022), price differences across sales channels (offline and online) lead consumers to undervalue product quality (as prices are then salient), which can result in the monopolistic upstream manufacturer biasing quality downward (or sometimes upward to avoid price differences across sales channels). More generally, the notion that consumers assess different offers relative to a reference point has, in different forms, gained wide acceptance in Behavioral Economics and Marketing (there, dating back at least to Monroe, 1973).…”