Discussion Paper Details

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Title: Managing Channel Profits when Retailers have Profitable Outside Options

Author(s): Roman Inderst and Greg Shaffer

Publication Date: April 2019

Keyword(s): channel coordination, Distribution channels and Game theory

Programme Area(s): Industrial Organization

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.

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Bibliographic Reference

Inderst, R and Shaffer, G. 2019. 'Managing Channel Profits when Retailers have Profitable Outside Options'. London, Centre for Economic Policy Research.