Experimental Tests of Solution to the Double-Marginalization Problem A Reference-Dependent Approach

The \double-marginalization " problem associated with linear wholesale price contract has long been recognized as a threat to vertical channel coordination. Many solutions involving more complex contract formats have been proposed to address this problem. Extant economic theories predict these solutions to be revenue and division equivalent in that they all restore full channel e±ciency and give the same surplus to the upstream party assuming constant relative bargaining power. We conduct a laboratory experiment to test the empirical equivalence of two variants of a two-part tari ® contract. The ¯rst variant charges the downstream party a ¯xed fee for participation and a uniform unit price. The second variant takes the form of a quantity discount contract with the total cost to the downstream party identical to that of the ¯rst variant for a given quantity. Surprisingly, the two-part tari ® mechanism fails to solve the double-marginalization prob-lem even in a well-controlled market environment. Both variants of the two-part tari® do not not achieve full channel e±ciency; they are statistically no better than the linear wholesale price contract. Revenue equivalence fails because the second variant achieves