The Retail Supply Chain
There are many steps involved in getting a product to the end consumer, even though the process may appear simple from the consumer's point of view. Â As consumers, however, we can get a lot of insight into why markets act the way that they do by thinking about the relationship between the manufacturer or distributor and the retailer. Â Most people know that goods are sold to retailers in wholesale markets and then sold to consumers in retail markets.
 So how do producers and retailers agree on prices and other terms of trade?Â
The Wholesale Pricing Model
When people think about wholesale markets, they likely envision what is known as a wholesale pricing model. Â In this model, the manufacturer sets a price for the product and sells to the retailer. Â The retailer in turn sells it to the consumer, generally at whatever price it chooses. Â (In some cases, however, manufacturers will engage in what is known as "resale price maintenance" where they contract with retailers regarding what price or range of prices to charge to the end consumer.)
In reality, the wholesale pricing model is not quite as simple as the above description makes it seem.  For example, the retailer may be able to return some of the product to the manufacturer if it doesn't sell in some cases, or  it may have an agreement with the manufacturer regarding what happens if the retailer puts the product on sale.  Nonetheless, it's fair to say to a rough approximation that the manufacturer gets to choose the price it gets for its output under the wholesale model.
Manufacturers and retailers can also decide to operate according to what is known as an agency pricing model. Â Under an agency pricing model, the manufacturer and retailer agree on how the revenue from selling the product to the consumer will be divided.
This pricing model has an interesting feature in that when one party decides to change the selling price of the product, both parties are affected in terms of how much revenue they receive.
 As a result, which party gets to decide at what price the good will be sold to the consumer is a crucial aspect of any agency pricing agreement.Â
Historically, manufacturer and retailers have generally operated according to the wholesale pricing model.  More recently, however, there has been somewhat of a trend toward agency pricing, most notably in markets for digital products  One of the first large-scale examples of the agency pricing model is iTunes, where copyright holders receive 70 percent of the selling price and iTunes gets 30 percent.
 In this example, the copyright holder (artist, record label, etc.) can set the selling price to some degree (in many cases, copyright holders can sell individual tracks for $0.69, $0.99, or $1.29 and also have several options for album prices).
Originally, Amazon adopted the wholesale pricing model for the sale of Kindle books. Eventually, however, the industry largely moved to an agency pricing model, following the lead of Apple and its e-book sore.  Like with iTunes, the terms of the agreements were generally that the copyright holder (author, publisher, etc.) would get 70 percent of the selling price and the seller would get 30 percent.  (Interestingly, the adoption of the agency pricing model industry-wide led to a price-fixing lawsuit against Apple.)  Similarly, digital streaming services such as Pandora and Spotify have implicitly adopted agancy pricing models since they agree to pay out a percentage of revenue- again, generally 70 percent- to copyright holders.
One open issue with the agency model, of course, is which party gets to set the price that the consumer pays.
 Originally, for example, book publishers got to choose the price under the agency model, but a price-fixing lawsuit in 2012 resulted in three of the five major publishing houses to agree to turn pricing decisions over to retailers for a period of two years.  Similarly, steaming services implicitly get to set prices since they decide how much to charge subscribers and advertisers.
There are many steps involved in getting a product to the end consumer, even though the process may appear simple from the consumer's point of view. Â As consumers, however, we can get a lot of insight into why markets act the way that they do by thinking about the relationship between the manufacturer or distributor and the retailer. Â Most people know that goods are sold to retailers in wholesale markets and then sold to consumers in retail markets.
 So how do producers and retailers agree on prices and other terms of trade?Â
The Wholesale Pricing Model
When people think about wholesale markets, they likely envision what is known as a wholesale pricing model. Â In this model, the manufacturer sets a price for the product and sells to the retailer. Â The retailer in turn sells it to the consumer, generally at whatever price it chooses. Â (In some cases, however, manufacturers will engage in what is known as "resale price maintenance" where they contract with retailers regarding what price or range of prices to charge to the end consumer.)
In reality, the wholesale pricing model is not quite as simple as the above description makes it seem.  For example, the retailer may be able to return some of the product to the manufacturer if it doesn't sell in some cases, or  it may have an agreement with the manufacturer regarding what happens if the retailer puts the product on sale.  Nonetheless, it's fair to say to a rough approximation that the manufacturer gets to choose the price it gets for its output under the wholesale model.
Manufacturers and retailers can also decide to operate according to what is known as an agency pricing model. Â Under an agency pricing model, the manufacturer and retailer agree on how the revenue from selling the product to the consumer will be divided.
This pricing model has an interesting feature in that when one party decides to change the selling price of the product, both parties are affected in terms of how much revenue they receive.
 As a result, which party gets to decide at what price the good will be sold to the consumer is a crucial aspect of any agency pricing agreement.Â
Historically, manufacturer and retailers have generally operated according to the wholesale pricing model.  More recently, however, there has been somewhat of a trend toward agency pricing, most notably in markets for digital products  One of the first large-scale examples of the agency pricing model is iTunes, where copyright holders receive 70 percent of the selling price and iTunes gets 30 percent.
 In this example, the copyright holder (artist, record label, etc.) can set the selling price to some degree (in many cases, copyright holders can sell individual tracks for $0.69, $0.99, or $1.29 and also have several options for album prices).
Originally, Amazon adopted the wholesale pricing model for the sale of Kindle books. Eventually, however, the industry largely moved to an agency pricing model, following the lead of Apple and its e-book sore.  Like with iTunes, the terms of the agreements were generally that the copyright holder (author, publisher, etc.) would get 70 percent of the selling price and the seller would get 30 percent.  (Interestingly, the adoption of the agency pricing model industry-wide led to a price-fixing lawsuit against Apple.)  Similarly, digital streaming services such as Pandora and Spotify have implicitly adopted agancy pricing models since they agree to pay out a percentage of revenue- again, generally 70 percent- to copyright holders.
One open issue with the agency model, of course, is which party gets to set the price that the consumer pays.
 Originally, for example, book publishers got to choose the price under the agency model, but a price-fixing lawsuit in 2012 resulted in three of the five major publishing houses to agree to turn pricing decisions over to retailers for a period of two years.  Similarly, steaming services implicitly get to set prices since they decide how much to charge subscribers and advertisers.