We study the effects of entry in a downstream market where firms (e.g., Compaq and IBM; CVS and Safeway) buy an input (e.g., microprocessor, grocery items) from an upstream supplier (e.g., Intel, Procter & Gamble) and sell their output to consumers. We show demand conditions where, contrary to conventional wisdom, entry of a new downstream firm lowers the downstream-market output and increases the consumer price. Thus consumers may be better off with fewer sellers in such markets. We also show that this entry may cause the profit of each incumbent downstream firm to: (i) remain unchanged; (ii) decrease; or (iii) even increase. Also, for a class of widely used demand conditions, the supplier's optimal price is shown invariant to the entry/exit of its downstream buyer firms. We classify all possible effects of downstream entry in terms of fundamental market demand conditions.entry, vertical relationship, comparative-statics, oligopoly theory
In this article, the author provides a simple characterization of retailer response to manufacturer trade deals in terms of the consumer demand conditions that the retailer faces. Specifically, the author shows conditions on the curvature of consumer demand functions that make it optimal for a profit-maximizing retailer to pass through greater (less) than 100% of the trade deal amount it gets from a manufacturer. Using these conditions, the author demonstrates that whereas the linear and all concave consumer demand functions lead to less than 100% optimal retail passthrough, there exists a subset of convex consumer demand functions for which a retailer rationally engages in greater than 100% pass-through. This subset contains many commonly used demand functions, such as the constant elasticity demand function, the negative exponential demand function, and many other varying elasticity demand functions.
This paper examines the product positioning decisions of firms that enter a market sequentially and that have potentially different cost structures. It shows that if the first mover knows the second mover to have a lower production cost, it positions away from the most attractive location in the market; further, the larger the second-mover's cost advantage, the farther away the first mover positions from the most attractive location. The paper also models uncertainty in the first-mover's mind about the later-entrant's cost structure, and shows that an increase in this uncertainty (in the sense of mean-preserving spread) also makes the first mover position farther from the most attractive location in the market. Overall, this paper suggests that unless the first entrant in a market is certain that the later entrant will not have a superior cost structure, it may be better off leaving the best position in the market vacant and having a niche or fringe product.product positioning, sequential entry, first-mover advantage, Game Theory
Upward channel decentralization occurs when firms choose to not manufacture products by themselves and procure products from upstream suppliers. Current voices from marketing scholars and practitioners have predominantly focused on the cost benefits when production is outsourced to lower-cost upstream suppliers. In this paper, we study the effects of upward channel decentralization where competing firms can outsource their production to upstream suppliers who do not have any advantages on production costs. We show how downstream firms can still benefit from upward channel decentralization provided their product positioning is endogenous. Thus, we provide a new theory on the strategic benefits of upward channel decentralization. We also use this framework to show a new benefit to manufacturers selling through downstream retailers rather than directly. We examine the implications of our theory for consumer and social welfare, and also draw managerial implications. This paper was accepted by Pradeep Chintagunta, marketing.upward channel decentralization, production outsourcing, product positioning, distribution channel, game theory
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