# Oligopolistic producers and retail price wars

Consider an industry with few producers selling differentiated products. The products must be sold through retailers of whom also there are a few and who therefore possess some degree of market power. Each retailer sells the products of all producers.

What might be the reasons for the producers to dislike a price war among the retailers?

With just one producer my guess would have been that the producer would always like a retail price war since a more competitive retail sector would reduce the double-marginalization problem and hence allow the producer to capture more profits. Is this intuition right? And how does moving from monopoly to oligopoly in production change things?

This question comes from a real-world observation. This Diwali (which is to Indian retailers what Christmas is to western ones) there was an intense price war among online retailers in India. In response to this price war, many producers of consumer durables like TVs and cameras made public statements against this price war and actively discouraged consumers from buying from these online retailers by measures such as offering longer warranties for products bought from brick-and-mortar stores.

A simple explanation for this behavior is that this was just to appease the brick-and-mortar stores which still dominate Indian retail.

But could there be a deeper explanation?

One story I could think of was as follows: suppose that the price charged by producers to retailers is not directly observed. Then a retailer price war can make it harder to detect a cut in the producer-to-retailer price. This can cause any implicit price collusion between the producers to break down, something which none of the producers would like to happen.

But I'm sure this is not the only possible explanation.

Your observation about a monopoly producer are treated in the analysis of intra-brand competition. With two-part tariff contracts, producers can pay retailers a whole-sale price equal to marginal costs $w = c$, and extract the downstream profits through a fixed franchise fee $F$. Motta shows that vertical restraints such as retail price maintenance or exclusive areas imposed by monopoly producers on their downstream retailers are typically welfare enhancing (e.g. promoting customer service, such as in car dealers).