DP13642 Managing Channel Profits when Retailers have Profitable Outside Options

Author(s): Roman Inderst, Greg Shaffer
Publication Date: April 2019
Date Revised: April 2019
Keyword(s): channel coordination, Distribution channels, Game theory
JEL(s):
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13642

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.