Who should handle retail? Vertical contracts, customer service, and social welfare in a Chinese mobile phone market

- We observe a switch of retail responsibilities from retailer to manufacturers in the sale of mobile phones.
- This switch coincides with a shift from linear pricing to revenue sharing.
- Estimates indicate that the shift coincided with an increase in demand, consistent with customer service improving.
- Counterfactuals suggest that consumer surplus and welfare increased markedly after the switch.
- Counterfactuals suggest manufacturers in China have sizable cost advantage over retailers in service quality provision.

Using data on mobile phone handset sales from a single retail store, we examine the impact of different retail responsibility designations and vertical contracts on seller service provision, firm profitability, and social welfare. During our sample, this store switched from retailer-managed retailing with linear pricing contracts to manufacturer-managed retailing with revenue-sharing contracts. We estimate consumer demand and manufacturer cost parameters. Demand estimates indicate a large positive shift that coincided with the vertical change, consistent with improved retail customer service. Welfare estimates suggest that consumers derived substantial surplus from the improved customer service in addition to that from lowered prices.