Channel Performance and Incentives for Retail Cost Misrepresentation.

This paper investigates the price decision making and channel performance under cost misrepresentation at the retail stage. In the standard double marginalization game, we introduce a preliminary stage, where the retailer can misrepresent her constant marginal cost. We give respective sufficient conditions on the demand function for the retailer to misrepresent her marginal cost downwards and upwards. In contrast to the literature, we prove that the opportunistic behavior of the retailer does not necessarily lower channel performance and social welfare. Indeed, a downward misrepresentation of the retail cost, which one obtains when the price elasticity of demand is not very price elastic, increases channel performance and social welfare. Illustrative examples using common specifications of demand are provided.