Channel Bargaining with Retailer Asymmetry

Dukes, Anthony J.; Gal‐Or, Esther; Srinivasan, Kannan

doi:10.1509/jmkr.43.1.84

Cited by 178 publications

(102 citation statements)

References 20 publications

(36 reference statements)

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“…Both, Chen (2003) and Dukes et al, (2006) (2001) and Iyer (1998) suggest, manufacturers might be using more complicated pricing schemes. Future research thus needs to better incorporate the characteristics of channel members, characteristics of the product, and consumer behavior, in analyzing the issue of setting a wholesale pricing contract, while allowing for the use of a combination of different pricing schemes.…”

Section: Future Researchmentioning

confidence: 99%

Pricing in Marketing Channels

Sudhir¹,

Datta²

2009

Handbook of Pricing Research in Marketing

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This paper provides a critical review of research on pricing within a channel environment. We first describe the literature in terms of increasing time horizons of decision making in a channel setting: (1) retail pass-through (2) pricing contracts and (3) channel design; all of which occur within a given market environment. We then describe the emerging empirical literature on structural econometric models of channels and its use in (1) inferring channel participant behavior and (2) policy simulations in a channel setting. We also discuss potential areas for future research in each area. Pricing in Marketing Channels"Price" and "Channel" are two of the four elements of the marketing mix that managers control, yet they differ fundamentally in how managers can use them to impact market demand.While price is the most flexible, in that managers can change it most easily to impact short-run demand, the distribution channel through which firms reach their end consumer is the least flexible and perhaps the costliest to change in the short run. Therefore, channel design is viewed as part of a firm's long run strategy. Most importantly, in the presence of a typically decentralized distribution channel, an upstream price change by a manufacturer does not affect consumer demand directly, but only through how this upstream price change affects the retail price set downstream in the channel.In his review of the pricing literature, Rao (1984) stated that "the issues of pricing along the distribution channel… have not received much attention in the literature." However, over the last 25 years, this gap has been remedied substantially. The tools of game theory have revolutionized the theoretical analysis of pricing within the channel and clarified the many issues about how prices are set within a channel; more importantly, these analyses have given insights on the optimal long-term channel strategy, given how prices will be set within the channel. A smaller but emerging empirical literature on structural models of channels has provided us insights on the behavior of channel participants and tools to perform policy analysis in a channel setting. The purpose of this article is to provide a critical review of this literature, identify the key themes of understanding that have emerged from research to-date and to identify important gaps in our knowledge that would benefit from future research.Given the short-run nature of price and the long-run nature of the channel, we organize the literature in terms of three key issues of managerial interest that progressively increase in their time horizons for the decision. The three sets of questions are:1. Conditional on the distribution channel (which is fixed in the short run) and other market characteristics, how can a change in upstream price affect the downstream price seen by the end consumer? This question of "pass-through" is the most short-term of the three sets of decisions we consider. Pass-through is of interest to an upstream manager because it determines the extent to w...

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Section: Future Researchmentioning

confidence: 99%

Pricing in Marketing Channels

Sudhir¹,

Datta²

2009

Handbook of Pricing Research in Marketing

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“…Our interpretation of the generalized Nash bargaining model follows the theoretical papers by Iyer & Villas-Boas (2003) and Dukes et al (2006).…”

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confidence: 97%

“…The recent theoretical literature suggests that an increase in the bargaining power of the retailer decreases the distortion due to double marginalization and hence leads to a more profitable distribution channel (Iyer & Villas-Boas 2003, Dukes et al 2006. Recall from Table 8 that an increase in retailer size or a decrease in manufacturer size adds to retailer bargaining power.…”

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confidence: 99%

“…We extend their work by allowing for retailer competition and relating the bargaining power parameter to manufacturer and retailer characteristics. Furthermore, we consider a different model set up, which follows closely the theoretical literature on bargaining in distribution channels of Iyer & Villas-Boas (2003) and Dukes et al (2006). The remainder of this paper is organized as follows.…”

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confidence: 99%

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

2010

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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.

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“…In Clark and Pereau (2008) the negotiations are inter-dependent because the terms to divide the fixed pie need to be agreed by all parties, and in Aghion and Bolton (1987) and Shaffer (2007, 2010), because the contract form is assumed to be sufficiently general such that the transfer price in each negotiation is dependent on the purchase quantities from both sellers. However, we consider multiple bilateral negotiations between an upstream manufacturer and two retailers that compete in the downstream market, where the bargaining externality results from the demand re-allocation of the comparison 3 Several papers examine the effects of bargaining in markets (e.g., Horn and Wolinsky 1988, Dukes et al 2006, Chen et al 2008). Dobson and Waterson (1997) analyze the effect of retail concentration on channel bargaining, while Shaffer (2001) considers channel efficiency when multi-product retailers bargain bilaterally with upstream parties.…”

Section: Related Researchmentioning

confidence: 99%

Multilateral Bargaining and Downstream Competition

Guo

Iyer

2013

Marketing Science

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We examine multilateral bargaining in vertical supply relationships which involve an upstream manufacturer who sells through two competing retailers to end consumers. In these relationships the negotiations are inter-dependent and a bargaining externality may arise across the retailers. In addition, the timing by which the manufacturer negotiates with the retailers becomes important.The manufacturer may negotiate simultaneously with the retailers or sequentially with one retailer at a time. In simultaneous bargaining the retailers negotiate without knowing if an agreement has been reached in the other retail channel, whereas in sequential bargaining the retailer in the second negotiation is able to observe whether an agreement was reached in the first negotiation. This observability of the existence of a prior agreement in the case of sequential negotiations can endogenously affect the bargaining externality. We show that simultaneous bargaining is optimal for the manufacturer when the retail prices (and profitability) are similar, while sequential bargaining is preferred when the dispersion in the retail prices is sufficiently large. As a result of ex post renegotiations, the manufacturer may strategically stock out the less profitable retailer who charged a relatively low retail price, and exclusively supply only the retailer who charged a relatively high retail price and maintain high channel profitability. Moreover, ex post multilateral bargaining can buffer downstream competition and thus lead to positive retail profits even in markets that are close to perfect competition.

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Channel Bargaining with Retailer Asymmetry

Abstract: The authors thank the two anonymous JMR reviewers, whose thoughtful suggestions greatly improved the article. Rakesh Niraj also provided useful comments, and the authors are grateful to Emmanuel Patrakis and Steven Shugan for their insightful suggestions.

Cited by 178 publications

References 20 publications

Pricing in Marketing Channels

Pricing in Marketing Channels

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

Multilateral Bargaining and Downstream Competition

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