Friction in Related-Party Trade When a Rival Is Also a Customer

Anil Arya (), Brian Mittendorf () and Dae-Hee Yoon ()
Additional contact information
Anil Arya: Fisher College of Business, Ohio State University, Columbus, Ohio 43210
Brian Mittendorf: School of Management, Yale University, New Haven, Connecticut 06520
Dae-Hee Yoon: School of Management, Yale University, New Haven, Connecticut 06520

Management Science, 2008, vol. 54, issue 11, 1850-1860

Abstract: There are many circumstances in which manufacturers provide inputs to wholesale customers only to subsequently compete with these wholesale customers in the retail realm. Such dual distribution arrangements commonly suffer from excessive encroachment in that the manufacturer's ex post retail aggression is harmful ex ante because it undercuts potential wholesale profits. This paper demonstrates that with dual distribution, a manufacturer can benefit from decentralized control and the use of transfer prices above marginal cost. Although these arrangements often create coordination concerns, a moderate presence of such concerns permits the manufacturer to credibly convey to its wholesale customer that it will not excessively encroach on its retail territory. This, in turn, permits the manufacturer to reap greater wholesale profits. We also note that this force can point to a silver lining in arm's-length (parity) requirements on transfer pricing in that they can solidify commitments to a particular retail posture.

Keywords: decentralization; supply chains; transfer pricing (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.1080.0906 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:54:y:2008:i:11:p:1850-1860

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().