Channel Coordination in the Presence of a Dominant Retailer

Jagmohan Raju () and Z. John Zhang ()
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Jagmohan Raju: The Wharton School, University of Pennsylvania, 700 Jon M. Huntsman Hall, 3730 Walnut Street, Philadelphia, Pennsylvania 19104-6340
Z. John Zhang: The Wharton School, University of Pennsylvania, 700 Jon M. Huntsman Hall, 3730 Walnut Street, Philadelphia, Pennsylvania 19104-6340

Marketing Science, 2005, vol. 24, issue 2, 254-262

Abstract: The retail trade today is increasingly dominated by large, centrally managed “power retailers.” In this paper, we develop a channel model in the presence of a dominant retailer to examine how a manufacturer can best coordinate such a channel. We show that such a channel can be coordinated to the benefit of the manufacturer through either quantity discounts or a menu of two-part tariffs. Both pricing mechanisms allow the manufacturer to charge different effective prices and extract different surpluses from the two different types of retailers, even though they both have the appearance of being “fair.” However, quantity discounts and two-part tariffs are not equally efficient from the manufacturer’s perspective as a channel coordination mechanism. Therefore, the manufacturer must judiciously select its channel coordination mechanism. Our analysis also sheds light on the role of “street money” in channel coordination. We show that such a practice can arise from a manufacturer’s effort to mete out minimum incentives to engage the dominant retailer in channel coordination. From this perspective, we derive testable implications with regard to the practice of street money.

Keywords: distribution channels; channel power; channel coordination (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (123)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:24:y:2005:i:2:p:254-262

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