Brand-owners’ Vertical and Horizontal Alliance Strategies Confronting Dominant Retailers: Effect of Demand Substitutability and Complementarity

Posted: 19 Dec 2019

See all articles by Xiaopo Zhuo

Xiaopo Zhuo

Sun Yat-Sen University (SYSU) - Business School

Baozhuang Niu

School of Business Administration, South China University of Technology; School of Business Administration, South China University of Technology

Date Written: December 4, 2019

Abstract

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

Suggested Citation

Zhuo, Xiaopo and Niu, Baozhuang, Brand-owners’ Vertical and Horizontal Alliance Strategies Confronting Dominant Retailers: Effect of Demand Substitutability and Complementarity (December 4, 2019). Available at SSRN: https://ssrn.com/abstract=3498264

Xiaopo Zhuo (Contact Author)

Sun Yat-Sen University (SYSU) - Business School ( email )

135 Xingang West Road
Sun Yat-Sen University
Guangzhou, Guangdong 510275
China

Baozhuang Niu

School of Business Administration, South China University of Technology ( email )

Wushan
Guangzhou
China

School of Business Administration, South China University of Technology ( email )

381, Wushan Road
Tianhe
Guangzhou, NY Guangzhou 510275
China

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