Managing Channel Profits When Retailers Have Profitable Outside Options

40 Pages Posted: 9 Apr 2019 Last revised: 29 Apr 2019

See all articles by Roman Inderst

Roman Inderst

Goethe University Frankfurt

Greg Shaffer

University of Rochester - Simon Business School

Date Written: April 2019

Abstract

The channel-coordination literature typically focuses on how a supplier canovercome 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.

Keywords: channel coordination, Distribution channels, Game theory

Suggested Citation

Inderst, Roman and Shaffer, Greg, Managing Channel Profits When Retailers Have Profitable Outside Options (April 2019). CEPR Discussion Paper No. DP13642, Available at SSRN: https://ssrn.com/abstract=3368139

Roman Inderst (Contact Author)

Goethe University Frankfurt ( email )

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Frankfurt am Main, Hessen 60629
Germany
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HOME PAGE: http://www.wiwi.uni-frankfurt.de/en/departments/finance/lehrstuhl/prof-dr-roman-inderst/team

Greg Shaffer

University of Rochester - Simon Business School ( email )

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