Brand-owners’ Vertical and Horizontal Alliance Strategies Confronting Dominant Retailers: Effect of Demand Substitutability and Complementarity
Posted: 19 Dec 2019
Date Written: December 4, 2019
Confronting dominant retailers, brand-owners are reported increasingly ally with the dominant retailers or ally with other brand-owners. To study brand-owners’ alliance strategies, we consider a bilateral duopoly setting comprising two brand-owners and two dominant retailers. The brand-owners’ alliance strategies result in three typical structures: (1) the flexible structure, where each brand-owner can sell products via any retailer; (2) the vertical structure, where a brand-owner sells product exclusively via an allied retailer; and (3) the horizontal structure, where the brand-owners establish an alliance by cross-shareholding. In each structure, bilateral contract negotiations between brand-owner and retailers are conducted, with consideration of demand substitutability and complementarity. We identify the vertical alliance effect and horizontal alliance effect, which both lead to a more monopolistic market in different ways. In the vertical structure, a win-win outcome exists when demand is substitutable, while the incentives for the brand-owners and retailers are not aligned when demand is complementary. In the horizontal structure, there is a win-win zone with respect to the revenue-sharing ratio for the brand-owners to establish a horizontal alliance when demand is substitutable. In contrast, their incentives to establish a horizontal alliance are weak due to the negative impact of the horizontal alliance effect, given complementary demand.
Keywords: Dominant retailer; Demand complementarity; Alliance strategies; Contract negotiation
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