Faculty of Economics and Business Administration Publications Database

Managing Channel Profits When Retailers Have Profitable Outside Options

Shaffer, Greg
Volume: 65
Number: 2
Pages: 642 - 659
ISSN-Print: 0025-1909
Link External Source: Online Version
Year: 2018
Keywords: channel coordination; distribution channels; game theory

The channel-coordination literature typically focuses on how a supplier can overcome channel inefficiencies stemming from misaligned pricing incentives. In contrast, we show that when an incumbent supplier faces competition from other suppliers to supply the downstream firms, it may want to create inefficiencies. Our analysis offers useful prescriptions for how incumbent suppliers should react to competitive threats by smaller competitors, how manufacturers should react to powerful retailers who can produce their own private-label brands, and how upstream firms should optimally treat downstream firms who may have different marginal costs of distribution. Our analysis also explains why wholesale prices and thus final-goods prices would be expected to decrease when there is an increase in upstream or downstream competition.