A Larger Slice or a Larger Pie? An Empirical Investigation of Bargaining Power in the Distribution Channel

Abstract

This research aims to provide insights into the determinants of channel profitability and the relative power in the channel by considering consumer demand and the interactions between manufacturers and retailers in an equilibrium model. We use the Nash bargaining solution to determine wholesale prices and thus how margins are split in the channel. Equilibrium margins are a function of demand primitives and of retailer and manufacturer bargaining power. Bargaining power is itself a function of exogenous retail and manufacturer characteristics. The parties' bargaining positions are determined endogenously from the estimated substitution patterns on the demand side. The more they have to lose in a negotiation relative to an outside option, the weaker the bargaining position.We use the proposed bargaining model to investigate the role of the three main factors that have been blamed for the power shift from manufacturers to retailers in recent years (firm size increases, store brand introductions, and service level differentiation). In our empirical analysis of the German market for coffee, we find that bargaining power varies among the different manufacturerretailer pairs. This result suggests that bargaining power is not an inherent characteristic of a firm but rather depends on the negotiation partner. We are able to confirm empirically previous theoretical findings that there can be cases where the slice of the pie that goes to one of the channel members may decrease but the overall pie increases and compensates for the smaller share of profits.

Mergers When Prices Are Negotiated: Evidence from the Hospital Industry

“…Grennan (2013) studies negotiated prices set between hospitals and suppliers of medical devices. In the marketing literature, Draganska and Villas-Boas (2011) and Meza and Sudhir (2010) estimate the relative bargaining power of manufacturers and retailers in the markets for coffee and breakfast cereals, respectively. Sieg (2000) estimates a bargaining model with asymmetric information of malpractice disputes and Keniston (2011) estimates passengers and auto-rickshaw drivers bargaining in India.…”

About farmers’ bargaining power within the new CAP

“…They notice that a distortive behaviour of retailers and food companies have concurred to enlarge the gap between farmers' and retailers' prices, and call for more research to evaluate buyers' power nature and causes. Bonnet and Zohra (2015), using a model of Draganska et al (2010), observe that value added created by organic label in the French fluid milk market helped to balance bargaining power along the supply chain. Lianos and Lombardi (2016) use a holistic approach in the Global Value Chain framework.…”

Empirical models of manufacturer-retailer interaction: A review and agenda for future research

“…Using a similar approach, Villas-Boas and Zhao (2005) find small but statistically significant deviations from the MS model. An alternative approach to flexibly determine the nature of vertical interaction has been proposed by Draganska, Klapper, and Villas-Boas (2009). These authors develop and estimate a Nash bargaining model of manufacturer-retailer interactions, which allows for a behavioral interpretation of the deviations from MS or VN by relating these deviations to bargaining power.…”

“…Villas-Boas and Zhao (2005) and Draganska et al (2008) find evidence of manufacturer power in a setting where wholesale price is unobserved and in Draganska et al (2009) retailers are allowed to compete with each other while Kadiyali et al (2000) find evidence of retailer power in a setting where wholesale price is observed and retailers are assumed to be local monopolists. The former is in line with Farris and Ailawadi (1992) and Ailawadi, Borin, and Farris (1995), who do not find support for increasing retailer profitability in aggregate industry trends.…”

“…[2] In the work of Draganska et al (2009), one of the aspects studied is the understanding of power in the channel via a Nash bargaining game embedded within a structural choice framework. How much does bargaining power change over time?…”