Free Riding and Sales Strategies for the Internet

For many products, Internet sales can free ride off of the promotional effort exerted by brick and mortar retailers, leading manufacturers to attempt to control the availability and pricing of their products over the Internet. We examine three categories of products: fragrances, DVD players, and side-by-side refrigerators. Our evidence suggests that manufacturers that limit distribution in the physical world use various mechanisms to limit distribution online. In particular, these manufacturers generally prevent the sale of their products by Internet retailers that offer deep discounts. Furthermore, manufacturer websites tend to charge high prices, suggesting that manufacturers may internalize free rider issues.