Managing Channel Profits

Abstract

A channel of distribution consists of different channel members each having his own decision variables. However, each channel member's decisions do affect the other channel members' profits and, as a consequence, actions. A lack of coordination of these decisions can lead to undesirable consequences. For example, in the simple manufacturer-retailer-consumer channel, uncoordinated and independent channel members' decisions over margins result in a higher price paid by the consumer than if those decisions were coordinated. In addition, the ensuing suboptimal volume leads to lower profits for both the manufacturer and the retailer. This paper explores the problems inherent in channel coordination. We address the following questions. —What is the effect of channel coordination? —What causes a lack of coordination in the channel? —How difficult is it to achieve channel coordination? —What mechanisms exist which can achieve channel coordination? —What are the strengths and weaknesses of these mechanism? —What is the role of nonprice variables (e.g., manufacturer advertising, retailer shelf-space) in coordination? —Does the lack of coordination affect normative implications from in-store experimentation? —Can quantity discounts be a coordination mechanism? —Are some marketing practices actually disguised quantity discounts? We review the literature and present a simple formulation illustrating the roots of the coordination problem. We then derive the form of the quantity discount schedule that results in optimum channel profits.distribution, profitability, margins, coordination

“Pie Sharing” in Complex Collaboration Contexts

“…Research in marketing has examined the issue peripherally, in other contexts, but there has never been an explicit focus on the process or its impact on the relationship. For example, research on channel coordination mentions the use of an equality rule (Jeuland and Shugan 1983) and an equity rule (Stern, El-Ansary and Coughlan 1996) in aligning the parties' incentives and fostering desirable coordination behaviors. Research on bargaining behavior examines the payoffs to individual parties, however the emphasis of this stream of work is on how bargaining processes determine the terms of exchange or enable the parties to manage power asymmetries (Dwyer 1984;Dwyer and Walker 1981;Walker 1981).…”

Online Market Coordination

“…We assume that i∈A χ i = 1. The following contract is in the scheme of profit sharing contract in [5], Definition 7. Let χ i > 0 be a portion parameter of profit sharing contract τ .…”

Evolution of Agricultural Marketing Institutions: A Channel Approach

“…415-431;Stern, El-Ansary, 1992, pp. 304-311) analyze channel structures by focusing on the relationship between a profit maximizing manufacturer and a retailer under different assumptions about: a) the degree of integration (the retailer is integrated with the manufacturer or is independent); b) the type of market structure (the manufacturer is a monopolist or not; and sells to an exclusive retailer or not (McGuire and Staelin, 1983)); c) the profit function of the manufacturer (costs of retail services are fixed, marginal costs of production and retailing are stable, the demand function is linear or non linear); d) the profit-sharing arrangement (Jeuland and Shugan, 1983).…”