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In many markets, consumers may benefit from high-quality retail services like well-informed staff members or speedy delivery of online orders. But how can manufacturers motivate their retailers to provide such services?
In a new paper, BECCLE-researchers Teis Lunde Lømo and Simen A. Ulsaker illustrate that manufacturers may reward retail service provision with lump-sum payments. In particular, Lømo and Ulsaker find that if trade takes place in an environment with sufficient time horizon, the promise of such payments can be completely informal and still incentivize the retailers to go the extra mile. In addition, Lømo and Ulsaker find that a legal prohibition on lump-sum payments from manufacturers to retailers (a regulation that is often thought to benefit consumers and society) may distort the service level and thereby reduce consumer welfare.
The full paper, entitled “Lump-sum payments and retail services: A relational contracting perspective,” is forthcoming in The Journal of Industrial Economics.