Direct Sales and Bargaining

Cutting out the intermediary and selling directly to consumers is an increasingly common strategy by manufacturers. We develop a structural model of vertical relations where manufacturers bargain with retailers and sell their products directly to consumers. Direct sales generate potential consumer gains due to additional competition and product variety but also increase manufacturers’ bargaining leverage, thereby increasing upstream and downstream prices and potentially reducing consumer welfare. We estimate the model using data from the outdoor advertising industry to quantify the bargaining-leverage and welfare effects of direct sales. We discuss the relevance of the bargaining-leverage effect for vertical merger evaluation.